When people talk about the stock market, they’re often referring to indexes like the S&P 500. Historically, these indexes have produced positive long-term returns – but the path is rarely smooth. This article goes into the detail of what ‘average stock market return’ really means.
‘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:
Other definitions that matter here:
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.
Stock market returns are influenced by many moving parts. Some factors are economic, while others are behavioral. Here are the common drivers:
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:
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.
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):
Asset type (example index) | Historical compound annual return (approx.) |
Small-cap US stocks | 11.8% |
Large-cap US stocks | 10.4% |
US government bonds | 5.0% |
US Treasury bills (cash-like) | 3.3% |
Inflation (CPI) | 2.9% |
These numbers help illustrate two practical ideas:
Average returns can be useful for learning, but they’re not a forecast. Here are a few ways investors could use averages:
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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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All investments involve risk, and not all risks are suitable for every investor. The value of securities may fluctuate and as a result, clients may lose more than their original investment. The past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit or protect against loss in a down market. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing.
