Table of Contents
What Is a Stock Market Return?
A stock market return is the profit, dividend, or both that an investor receives on their investment. To understand stock market returns, it helps to know why the stock market fluctuates.
A company share price may increase or decrease depending on various factors, such as supply vs. demand, market sentimentality, changes in revenue, and political issues, just to name a few. All of these factors can influence the average rate of return on stocks an investor realizes.
Seemingly unconnected financial factors, like increasing trade tariffs between two nations, can impact the valuation of certain stocks in an interconnected economy. Since the stock market is volatile, it is at times influenced by emerging global events and sudden changes in the prices of goods that are available to US consumers and businesses.
Looking at a single stock — say, an airline stock — as an example, then applying that knowledge to the stock market at large, may help investors understand the fluctuations.
Factors that Impact the Stock Market
1: What is a stock?
Numerous factors affect the value of stocks and the average return on stocks for investors.
To continue with the airline example, the U.S. airline industry relies, in part, on leisure travelers’ discretionary spending — consumers opting to pay for flights that they do not need to take. When trade wars lead to less available money in Americans consumers’ pockets (i.e., certain taxed imports suddenly costing more), the market can react out of fear of future declines in sales or concern for the increasing cost of doing business. This is called market sentimentality, which can negatively affect a stock’s value.
When the US increased duties on Chinese metal imports, China reacted by levying tariffs on US exports. The 2019 announcement of retaliatory tariffs by China on the U.S.— impacting American-made goods like appliances, agriculture, construction equipment, textiles, and rubber — led to a one-day loss of $1 trillion in global stocks’ value.
As multiple companies’ share prices fluctuate simultaneously, the stock market as a whole can swing up or down. If a trade war affects various companies’ production overseas or consumer’s ability to spend domestically, numerous big businesses’ shares could drop, and the public could become uncertain about the U.S. economy. As a result, the market could dip. When tariffs on imports and exports ease, some stocks can rise—as traders anticipate reduced costs passed on to consumers and to businesses.
All this fluctuation affects stock market returns. When people wonder what their return will be, they’re asking how much they will have gained (or lost) in a year, or 10, 20, or 30 years. While everyone invests in different stocks and funds, a simple way to estimate how much they might gain is by looking at the average stock market return.
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Know moreMeasuring Growth in the Stock Market
How do people measure stock market returns? By looking at indexes. An index is a group of stocks that represents a section of the stock market, and there are roughly 5,000 indexes representing US stocks. Investors may be familiar with the three most popular market indexes: The Dow Jones Industrial Average, Nasdaq Composite, and S&P 500.
The S&P 500 index represents the 500 largest publicly traded companies, such as Microsoft, Apple, Amazon, Facebook, and Alphabet. It speaks for around 80% of the US stock market, so its performance is considered a good indicator of how the market is doing overall.
When people refer to the stock market and the average stock market return, they’re likely referring to the S&P 500.
What Is a Good Yearly Return on Stocks?
When discussing the average rate of return on stocks and what you can expect, it’s important to be realistic. As mentioned, the stock market average return tends to hover around 10%, though when you factor in inflation, stock market returns tend to be closer to 6%.
Using the 6% figure as a baseline, an investor might choose to construct a portfolio that’s designed to produce that level of returns. If you’re invested in funds that track the S&P 500, then you’re more likely to realize stock market returns that fall within the average or typical range. Anything above 6% might be considered icing on the cake.
If an investor is looking for above-average stock market returns, they might choose to take a more aggressive approach to building a portfolio, by looking at actively managed funds or momentum trading, for example, to try to capitalize on higher return potential. But those strategies can entail greater risk — and as always, there’s no guarantee that an investor will beat the market. Plus, active trading may mean paying higher expense ratios or commissions, which can eat into investment gains.
Using a buy-and-hold strategy and staying investing when the market moves up or down may help an investor realize consistent returns over time. With dollar-cost averaging, for instance, one would continue adding money to the market regardless of how high or low stock prices go. In doing so, they’d be able to ride the waves of the market as stock market returns increase or decrease, though they may not beat the market this way.
Taking this attitude can help an investor avoid falling into the trap of panic-selling when market volatility sets in. This is important because getting out of the market — or into it — at the wrong time could significantly impact a portfolio’s overall return profile.
What to expect the stock market to return
There are no guarantees in the market, but this 10% average has held remarkably steady for a long time.
So what kind of return can investors reasonably expect today from the stock market?
The answer to that depends a lot on what’s happened in the recent past. But here’s a simple rule of thumb: The higher the recent returns, the lower the future returns, and vice versa. Generally speaking, if you’re estimating how much your stock-market investment will return over time, we suggest using an average annual return of 6% and understanding that you’ll experience down years as well as up years. You can use NerdWallet’s investment calculator to see what 6% growth looks like based on how much you’re planning to invest.
Here are three key takeaways if you’re looking to make money in the stock market.
1. Temper your enthusiasm during good times. Congratulations, you’re making money. However, when stocks are running high, remember that the future is likely to be less good than the past. It seems investors have to relearn this lesson during every bull market cycle.
2. Become more optimistic when things look bad. A down market should cause you to celebrate: You can buy stocks at attractive valuations and anticipate higher future returns.
3. You get the average return only if you buy and hold. If you trade in and out of the market frequently, you can expect to earn less, sometimes much less. Commissions and taxes eat up your returns, while poorly timed trades erode your bankroll. Study after study shows that it’s almost impossible for even the professionals to beat the market.
Over time even a few percentage points can make the difference between retiring with a tidy nest egg and continuing to drudge away in your golden years.
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Know moreAverage stock market returns
In general, when people say “the stock market,” they mean the S&P 500 index. The S&P 500 is a collection — referred to as a stock market index — of just over 500 of the largest publicly traded U.S. companies. (The list is updated every quarter with major changes annually.) While there are thousands more stocks trading on U.S. stock exchanges, the S&P 500 comprises about 80% of the entire stock market value on its own, making it a useful proxy for the performance of the stock market as a whole.
The market’s results from one year to the next can vary significantly from the average. Let’s use the 2012-2021 period as an example:
- Down 4.4%: 1 year
- Up 2% or less: 1 year
- Up more than 20%: 4 years
- Up between 12% and 19%: 4 years
To put it another way, six of those 10 years resulted in outcomes that were very different from the 14.8% annualized average return over that decade. Of those six very different years, two generated significantly lower returns (with one year, 2018, resulting in losses), while four years delivered substantially higher returns. Two of those years — 2013 and 2019 — generated returns of more than 30%, helping to make up for the years that saw below-average returns.
10-year, 30-year, and 50-year average stock market returns
Let’s take a look at the stock market’s average annualized returns over the past 10, 30, and 50 years, using the S&P 500 as our proxy for the market.
| Period | Annualized Return (Nominal) | Annualized Real Return (Adjusted for Inflation) | $1 Becomes… (Nominal) | $1 Becomes… (Adjusted for Inflation) |
|---|---|---|---|---|
| 10 years (2012-2021) | 14.8% | 12.4% | $3.79 | $3.06 |
| 30 years (1992-2021) | 9.9% | 7.3% | $11.43 | $5.65 |
| 50 years (1972-2021) | 9.4% | 5.4% | $46.69 | $6.88 |
It’s worth highlighting the variance in annual returns from one year to the next versus the average. Since 1972, here is a breakdown of the yearly results:
- Returns of 20% or more: 19 years
- Returns between 10% and 20%: 13 years
- Returns between 0% and 10%: nine years
- Losses between 0% and 10%: four years
- Losses between 10% and 20%: two years
- Losses of more than 20%: three years
Stock market returns vs. inflation
In addition to showing the average returns, the table above also shows useful information on stock returns adjusted for inflation. For example, $1 invested in 1972 would be worth $46.69 today.
But, in spending power, $46 isn’t worth what it would have been in 1972. Adjusting for inflation, that $46 will buy the same amount of goods or services you would have been able to buy with $6.88 in 1972.
Buy-and-hold investing
If there’s any one lesson we can take from the breakdown of annual results versus the average, it’s that investors are far more likely to earn the best returns by investing for the long term. There’s simply no reliably accurate way to predict which years will be the good years and which years will underperform or even lead to losses.
But we do know that, historically, the stock market has gone up more years than it has gone down. The S&P 500 gained value in 40 of the past 50 years, generating an average annualized return of 9.4%. Despite that, only a handful of years actually came within a few percentage points of the actual average. Far more years significantly either underperformed or outperformed the average than were close to the average.
How Inflation Affects S&P 500 Returns
One of the major problems for an investor hoping to regularly recreate that 10.67% average return is inflation. Adjusted for inflation, the historical average annual return is only around 7%. There is an additional problem posed by the question of whether that inflation-adjusted average is accurate, since the adjustment is done using the inflation figures from the Consumer Price Index (CPI), whose numbers some analysts believe vastly understate the true inflation rate.
Future Stock Market Growth Predictions
As we can see from the outliers during the dot-com bust and financial crisis, when the stock market performs poorly, it tends to eventually bounce back. Similarly, if the stock market does exceptionally well, the market will eventually slow down and experience a loss. This can help with evening out the average return on stocks for investors.
The widely accepted rule is that if an investor’s rate of return is low now, they can expect it to be high in the future; if their rate of return is high now, they can expect it to be low in the future. Historically, the market balances out and experiences positive growth overall. Stock market returns increase around 70% of the time.
When share prices peak, then drop by 10% or more, that’s known as a stock market correction. If the market is doing swimmingly, investors can bet the market will correct itself by dipping.
All investments have risk, so there’s no way to guarantee a certain stock market return at all, let alone in a specific time frame. Numerous factors affect stocks’ performance, so it can be difficult to accurately predict how a stock will perform. And anyone who tells investors they can time the stock market to maximize returns is dead wrong.
What’s a Good Stock Market Return?
A good stock market return is the long-term average of 10%. However, determining an optimal return will depend upon the investor’s goals, risk tolerance, asset allocation, security selection, holding period, and other factors. A minimum return target is to outpace inflation, which averages 3-4% over time, and an optimal target is the stock market’s long-term average of 10%.
