Exploring Recent Trends in S&P 500 Compound Returns

Understanding the S&P 500's Recent Performance

2024 marked a noteworthy chapter for US stocks, as the S&P 500 recorded an impressive gain of 24.89%, inclusive of dividends. Meanwhile, small-cap stocks saw a growth of 11.38%, and the total international stock index also made positive strides with a 5.08% increase, all calculated in US dollar terms.

Sector Performance Analysis

Interestingly, the technology sector, which is often perceived as a leading force, underperformed the S&P 500 slightly, ranking as the fifth-best performer for the year. In contrast, communication services, driven by companies like Google and Meta, took the lead. Other sectors, including financials, consumer discretionary, and utilities, also surpassed the S&P 500. Despite all 11 sectors finishing in the positive, the materials sector lagged significantly, barely managing to close the year above water.

Economic Indicators to Watch

An important development in 2024 was the US dollar breaking out of its extended trading range over the past two years. This movement could have significant implications for multinational corporations and their earnings, along with foreign demand as we look ahead to 2025. Additional attention should be given to interest rates, which fluctuated between 4.7% and 3.6% throughout the year. A possible rise beyond the 2023 peak of around 5% could present challenges for equities, particularly if it does not stem from robust economic growth.

Long-Term Trends in Market Returns

The performance of the S&P 500 in 2024 exceeded the historical average return of 11.8% since 1928, with stocks finishing positively in approximately 73% of the years. Delving deeper into data reveals that since its inception, the S&P 500 has yielded a nominal compounded annual return of 9.94%. To put this into perspective, an investment of $100 back in 1928 would now be valued at an astounding $982,920.31, exemplifying the power of compound interest famously dubbed the “eighth wonder of the world” by Warren Buffett.

Insight into 10 and 20-Year Returns

Currently, the 10-year rolling return on the S&P 500 stands at 12.82%, above the historical average of 9.6% but below the significant threshold of around 17% that typically signals a bubble. Simultaneously, the 20-year rolling returns have recently increased to 10%, just shy of the long-term average of 10.3%. While future trends in these returns may rise, particularly as the effects of the 2008 market crash fade from the calculation, caution is warranted.

Valuation Perspectives

These valuation indicators should not act solely as timing mechanisms. It's entirely possible for the market to experience downturns even with favorable valuations. Typically, high readings suggest lower future expected returns, while lower readings indicate the opposite. For investors, these rolling returns can provide valuable insights, often proving more useful than traditional valuation metrics.

The Impact of Historical Trends

Historically, when the 10 and 20-year rolling returns entered bubble territory during the late 1950s and early 1960s, subsequent years saw stocks underperform the historical averages. The market even faced significant downturns at various points, illustrated by the crushing bear market of 1974. Similarly, the late 1990s bubble led to the 2000s bear market, highlighting how these indicators can foreshadow broader market conditions.

The Bottom Line

In conclusion, it's essential to recognize that stocks can rise without being classified as a bubble and can also fall without triggering a market crash. Understanding these dynamics helps investors make informed decisions in the ever-evolving landscape of the stock market.

Frequently Asked Questions

What is the S&P 500's performance in 2024?

The S&P 500 gained 24.89% in 2024, including dividends.

How do sector performances compare?

Communication services led the sector performance, while technology slightly underperformed against the S&P 500.

What interest rates were recorded in 2024?

The benchmark interest rate fluctuated between 4.7% and 3.6% in 2024.

What are the 10 and 20-year rolling returns?

The 10-year rolling return is 12.82%, while the 20-year rolling return is at 10%.

What can investors learn from historical trends?

Investors should consider that high rolling returns may suggest lower future performance, and downturns can happen even in favorable conditions.

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Disclaimer: The content of this article is solely for general informational purposes only; it does not represent legal, financial, or investment advice. Investors Hangout does not offer financial advice; the author is not a licensed financial advisor. Consult a qualified advisor before making any financial or investment decisions based on this article. The author's interpretation of publicly available data shapes the opinions presented here; as a result, they should not be taken as advice to purchase, sell, or hold any securities mentioned or any other investments. The author does not guarantee the accuracy, completeness, or timeliness of any material, providing it "as is." Information and market conditions may change; past performance is not indicative of future outcomes. If any of the material offered here is inaccurate, please contact us for corrections.