The Math Is Starting to Work Against Long-Term US Stock Returns

November 11

The (SPY) is up +27.04% YTD as of 11/8/2024. The 2023 total return for the S&P 500 was +26.19%.

If the S&P 500 remains exactly where it’s trading the last 6 weeks of the year (highly unlikely), then the arithmetic average of the last two years return for the main benchmark is +26.6%. (That’s a well-above average return).

If we average 2022, through 2024, and the SPY ends 2024 where it’s trading today, the average return falls to 11% since, 2022’s S&P 500 return was -18.17%.

The point being, readers / investors could make a good case the average return for the S&P 500 in 2025 will “revert to the mean” and could very likely be lower than the last two years.

Forecasts and predictions are virtually worthless, and yet they populate the mainstream financial media on a daily basis.

The point to readers is – I suspect – 2025 will be an average to below-average year for S&P 500 returns, while S&P 500 earnings could be quite robust, especially if the corporate tax rate is reduced.

This blog has tracked S&P 500 total returns since the early 1970’s, and the only period found that saw more than two years of +20% total returns – meaning only one period saw three consecutive years or more of +20% S&P 500 returns – was the period from 1995 to 1999, when the “average, annual” S&P 500 return for those five years was +28% per year. (For the Nasdaq, that “average, annual return” was even higher, but unfortunately, YCharts doesn’t have those or returns available, and when Morningstar bought Ibbotson i.e. the Stocks, Bonds, Bills & Inflation yearbook, in 2006, much of that fabulous historic return data disappeared.)

Here’s a few more quick averages:

S&P 500 return average: +15.65 for years 2018 – 2024;
S&P 500 return average: +18.98% for years 2019 – 2024;
S&P 500 return average: +16.04% for years 2020 to 2024;

Most readers have probably heard the old expression or maxim, “there’s lies, damned lies, and then there’s statistics” which has been around a while, but there’s some truth to the old saying.

This blog has tried to keep readers informed of the ” S&P 500 annual return” data through posts like , as well as style-box updates and such, but equity bull markets tend to bury everything in sight.

Thinking back on it, the S&P 500 and Nasdaq’s epic bull market that started in August, 1982, with Paul Volcker abandoning the “monetarist experiment” for a return to interest-rate targeting, ended in mid-March, 2000, without any particular economic or market event attached to it.

The “average” S&P 500 return for the period from 1982 to 1999 was – are you ready for this – +19% per year. There was only one negative year for the S&P 500’s return and that was 1990, i.e. the first Gulf War, and spiking to $40 per barrel.

A plausible case could be made for a few more good years of S&P 500 returns if the US corporate tax rate is reduced, and some of the productivity measures are instituted throughout federal government, but if US GDP growth takes off under a pro-business Republican President and Congress, and inflation concerns always accompany faster economic growth (look at the Clinton years in the late 1990’s), the only “relief valve” is the US Treasury market and higher interest rates, and – eventually – what’s bad for the Treasury market (i.e. higher interest rates), will always eventually come home to roost in the US stock market.

The S&P 500’s average, annual return from the year 2000 through October 31 ’24 is roughly 7.50%. That’s still a reasonable long-term return.

Some investors think a new bull market started in October ’22, but this secular bull began either on March 9, 2009, which means the current secular bull is 16 years old, or in May, 2013, when the S&P 500 made a new all-time-high (and stayed above it March 2000, high) which means this secular bull is just 11 – 12 years old.

The math is starting to work against long-term stock returns.

The risk–reward is definitely changing more towards risk, particularly for the mega-caps.

S&P 500 Data:

The S&P 500’s forward 4-quarter estimate fell this past week to $263.39 from last week’s $264.67, and early October’s $266.66;
The PE on the forward estimate after this week’s S&P 500 increase of +4.67%, is 22.77x and is the highest since late 2020’s Covid-influenced S&P 500 PE;
The S&P 500’s “earnings yield” fell to 4.39%, nearing the June, 2020 low of 4.11% (also heavily Covid-influenced);
What’s interesting about the S&P 500’s “upside surprise” data for both S&P 500 revenue and EPS, is that S&P 500 revenue has a +1.6% “upside surprise” rate for Q3 ’24, which is the best beat rate since Q2 ’22, while S&P 500 EPS “upside surprise” or beat rate is +7.8%, also the best surprise factor since Q2 ’22.

The S&P 500 PE ratio is nearing multi-year highs (and conversely the “EY” nearing multi-year lows).

Given the “upside surprise” data, Q3 ’24 earnings are coming in better than many people might think, with 449 S&P 500 components having reported already. The notable misses are or were Microsoft (NASDAQ:) and Apple’s (NASDAQ:) September ’24 quarter, but while Microsoft lowered their December ’24 rev guidance, Apple was their traditionally cautious selves. Apple iPhone revenue beat their September quarter estimate by $2 billion i.e. $46 vs the $44 bl estimate per Briefing.com.

None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Investing can and will involve the loss of principal, even for short periods of time. All S&P 500 earnings data is sourced from LSEG. None of this above data may be updated, and if updated, may not be done so in a timely fashion. Readers should gauge their own comfort with portfolio volatility and adjust accordingly.

Thanks for reading.

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