The S&P 500 is a widely referenced market capitalization-weighted index representing 500 leading publicly traded U.S. companies. Spanning nearly a century, it provides insights into the health of the U.S. stock market and economy, functioning as a critical benchmark for investors. Here, we dive into the average annual returns, historical trends, and other factors impacting the index’s performance.
Key Takeaways
- Historic Returns: Since its inception in 1928, the S&P 500 has returned an average of 9.90% annually. Since expanding to 500 stocks in 1957, its average annual return is slightly higher at 10.26%.
- Market Timing & Inflation: Both market timing and inflation play significant roles in actual investor returns, often impacting long-term gains.
- Investment Vehicles: Investors can access the index’s performance via ETFs and mutual funds that mirror its composition.
A Brief History of the S&P 500
The S&P 500’s history reflects the economic and market transformations over the decades:
- 1957–1969: The index expanded to 500 stocks, and post-WWII economic growth led to strong performance, reaching over 800.
- 1970s: The index dipped below 360 due to high inflation and stagflation, resulting in a period of volatility.
- 1980s–2000s: Significant growth was observed, with sharp downturns in periods like the 2000 Dot-com Bubble and the 2008 Financial Crisis.
- 2008 Financial Crisis: The index dropped 56.8% from October 2007 to March 2009 but saw an extraordinary recovery, climbing over 330% between 2009 and 2019.
- COVID-19 Pandemic: Initially plummeting by 15% in 2020, the S&P 500 rebounded during the second half of the year, reaching all-time highs by 2021.
- 2022-2023: The index experienced volatility, dropping 18% in 2022 but rebounding again in late 2023.
Annual S&P 500 Returns (1995–2022)
| Year | Annual Return (with Dividends) |
|---|---|
| 1995 | 37.20% |
| 1996 | 22.68% |
| 1997 | 33.10% |
| 1998 | 28.34% |
| 1999 | 20.89% |
| 2000 | -9.03% |
| 2001 | -11.85% |
| 2002 | -21.97% |
| 2003 | 28.36% |
| 2004 | 10.74% |
| 2005 | 4.83% |
| 2006 | 15.61% |
| 2007 | 5.48% |
| 2008 | -36.55% |
| 2009 | 25.94% |
| 2010 | 14.82% |
| 2011 | 2.10% |
| 2012 | 15.89% |
| 2013 | 32.15% |
| 2014 | 13.52% |
| 2015 | 1.38% |
| 2016 | 11.77% |
| 2017 | 21.61% |
| 2018 | -4.23% |
| 2019 | 31.21% |
| 2020 | 18.02% |
| 2021 | 28.47% |
| 2022 | -18.01% |
Source: Aswath Damodaran, NYU Stern School of Business
Inflation’s Impact on Returns
While the S&P 500 has historically averaged around 10.26% since 1957, inflation-adjusted returns typically fall to approximately 6.37%. Some analysts argue that this adjustment may understate the impact of inflation, as official Consumer Price Index (CPI) numbers may not fully capture real-world inflation effects.
The Role of Market Timing
Market timing can significantly affect investor returns. Those who invest during low points and hold through high points tend to maximize gains, whereas those who buy at highs and sell during dips may see lower or even negative returns. Dollar-cost averaging is a popular strategy to mitigate timing risk, allowing investors to invest consistently over time.
Investment Options for the S&P 500
As a stock index, the S&P 500 cannot be purchased directly. However, there are numerous index funds and ETFs that track its performance, offering investors an accessible way to diversify across 500 companies with a single investment. Popular funds include:
- SPDR S&P 500 ETF (SPY)
- iShares Core S&P 500 ETF (IVV)
- Vanguard S&P 500 ETF (VOO)
- Schwab S&P 500 Index Fund (SWPPX)
- Fidelity 500 Index Fund (FXAIX)
Recent Performance
As of January 2024, the S&P 500 remains a long-term investment favorite, particularly for those with a buy-and-hold strategy who can withstand market fluctuations. Its history of providing strong returns makes it a cornerstone in many portfolios, suitable for investors seeking steady, long-term gains over time.
The S&P 500’s historical performance, averaging nearly 10% annually, demonstrates resilience over time. Despite periods of volatility, it continues to deliver substantial long-term returns. By investing in S&P 500-tracking funds, investors can gain exposure to the broader U.S. market and benefit from a portfolio that reflects the growth and stability of America’s most prominent companies.
