What is the average stock market return?

What does ‘average stock market return’ mean?

‘Average stock market return’ usually describes the average performance of an index (often the S&P 500) over many years. The ‘performance’ in question is the gain or loss from holding stocks over a period of time. It typically includes two components:

• Price return, which is the change in share prices.
• Income return, which includes dividends paid by companies.

Other definitions that matter here:

• Annual return – The return in a single calendar year.
• Annualized return – The per-year return over a multi-year period (also called a compound annual growth rate). It’s not the same as simply averaging yearly returns.
• Nominal return – The return before adjusting for inflation.
• Real return – The return after adjusting for inflation (a closer view of purchasing-power growth).

Historical average returns of the US stock market

In the US, many ‘average stock market return’ discussions use the S&P 500 as a practical stand-in for large-cap US stocks. Over very long periods, historical datasets tend to show that US large stocks have delivered around 10% per year nominally and around 7% per year in real (inflation-adjusted) terms, depending on the exact time window and methodology.

One widely used long-run dataset reports a compound annual return of about 10.4% for large stocks and an average inflation rate of about 2.9% over the same period – implying a real return in the mid-to-high single digits. Remember, ‘real’ return depends on how you calculate compounding, it’s not just about subtracting inflation.

It’s also worth remembering that averages can hide a lot of variation. Some years deliver strong gains, while others can be sharply negative. For example, in the historical record, large-stock returns have included deep drawdowns during crises as well as powerful rebounds afterward.

Important note: Past performance doesn’t guarantee future results.

What factors influence market returns?

Stock market returns are influenced by many moving parts. Some factors are economic, while others are behavioral. Here are the common drivers:

• Inflation and interest rates: Higher interest rates can affect borrowing costs and valuations. Inflation can reduce real returns even when nominal returns look strong.
• Corporate earnings and productivity: Over time, business profits and productivity growth can support stock prices and dividends.
• Government policy and taxes: Changes in regulation, fiscal policy and corporate taxation can influence growth expectations.
• Market sentiment: Investor optimism or fear can move prices quickly, sometimes beyond what fundamentals alone would suggest.
• Global events: Wars, pandemics and supply-chain disruptions can create sudden uncertainty and volatility.

How does time horizon affect average returns?

Time horizon is one of the biggest reasons ‘average return’ can look confusing. In the short term, markets can be volatile. Over longer periods, compounding becomes more important than any one year. Annualized returns can look more stable because strong and weak years are blended together.

That said, longer horizons don’t remove risk – they just change the type of risk you face. For example:

• A short horizon may be more exposed to timing risk (buying right before a downturn).
• A long horizon may be more exposed to sequence risk (the order of good and bad years) and inflation risk (how purchasing power changes over time).

Diversification can also matter. Some investors use ETFs (Exchange-Traded Funds) to spread exposure across many companies instead of relying on a small number of individual stocks. Keep in mind that, while diversification may help spread risk, it doesn’t guarantee a profit or protect against loss in a downturn.

Average returns for different asset types

The stock market is only one part of the broader investing landscape. Historically, different assets have had different return patterns, as well as different risk levels.

Below is a simplified example of compound annual returns (1926 to 2024):

These numbers help illustrate two practical ideas:

1. Historically, higher returns tend to come with higher volatility.
2. Inflation changes the ‘real’ outcome. A 5% nominal return may not mean much if inflation is close to that level.

How to interpret market returns 

Average returns can be useful for learning, but they’re not a forecast. Here are a few ways investors could use averages:

• Apply historical context: A long-run average summarizes past outcomes over a defined period; it doesn't indicate what returns will be in the next year (or any other future period).
• Confirm what ‘return’ refers to: Investors often check whether the average is price return or total return (including dividends) – and whether it’s nominal or real (inflation-adjusted).
• Recognize short-term variability: Over shorter windows, returns can vary widely and may be influenced by temporary market and economic conditions.
• Separate return figures from product-specific outcomes. Index averages are benchmark measures; results for funds or portfolios can differ due to fees, tracking differences, taxes and implementation choices.

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FAQs about average stock market return

What is the average stock market return?
It’s a historical summary of how a broad stock index (often the S&P 500) has performed over a defined period. It’s usually expressed as an annual percentage return.

Why do I see different average return numbers?
Different sources may use different time ranges, indexes and calculation methods. Results can also differ depending on whether returns include dividends and whether they’re adjusted for inflation.

Is the average return the same as what happens each year?
No, year-to-year returns can vary widely, including negative years. An average smooths many different outcomes into a single summary figure.

What’s the difference between nominal and real returns?
Nominal return is the percentage gain before inflation. Real return adjusts for inflation, reflecting changes in purchasing power over time.

What’s the difference between price return and total return?
Price return includes only changes in index or stock prices. Total return includes both price changes and reinvested dividends, which can materially affect long-run results.

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