Markets will be markets: An analysis of long-term returns from the S&P 500

Vartika Gupta
 Vartika Gupta

Engages in research and discussions on capital market diagnostics, financial modeling, M&A, valuation, and cost of capital

David Kohn
 David Kohn

Leverages his deep understanding of corporate finance and valuation to provide an investor perspective and help clients identify value-creating strategies

 Tim Koller

Combines broad cross-sector experience with decades of service to clients in value creation, corporate strategy, capital-markets issues, and M&A transactions

 Werner Rehm

Works at the intersection of strategy and finance with high tech, industrial, and pharmaceutical clients to identify and prioritize corporate strategies for the energy transition, performance improvement, and growth

Investors have learned to ride out the highs—and more recently, the lows—of the US stock market. They expect fluctuations, and they react to short-term performance. Many might be surprised to learn, however, that since about 1800, stocks have consistently returned an average of 6.5 to 7.0 percent per year (after inflation).1 Our analysis shows that market returns in the past 25 years are within that historical range (exhibit).

Past performance is no indication of future results.

In 2001, the market capitalization of the companies that made up the S&P 500 was about $10 trillion. As of mid-June 2022 (even after a bearish opening to the year), S&P 500 market capitalization was about $32 trillion. The mean total yearly returns (including dividends) of the S&P 500 from 1996 to mid-June 2022 is 9 percent in nominal terms, or 6.8 percent in real terms—in line with historical results.

There were fluctuations, of course. The S&P 500 declined in 2000, 2001, and 2002, followed by a 37 percent fall in 2008 and a 22 percent fall in the first half of 2022. But from 1996 to mid-June 2022, S&P 500 returns declined annually only five times.

The lesson for investors? Don’t get sidetracked by short-term stock movements, which tend to stir up lots of headlines. Reasonable and largely stable returns (as measured by low stock price volatility over ten-year periods) will encourage more individuals to invest in the stock market. That, in turn, will provide capital for more growth and broader creation of wealth. Making the market an engine for not just value creation but sustainable, inclusive growth is a challenge for today—and could be an indication of economies’ future performance.

1. Jeremy J. Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, fifth edition, New York, NY: McGraw-Hill Education, 2014.

Vartika Gupta is a research science expert in McKinsey’s New York office, where David Kohn is a senior knowledge expert and associate partner; Tim Koller is a partner in the Denver office; and Werner Rehm is a partner in the New Jersey office.

A version of this blog post appears in the 20th anniversary edition of McKinsey on Finance.

For a full discussion of market dynamics, see Valuation: Measuring and Managing the Value of Companies (John Wiley & Sons, 2020), by Marc Goedhart, Tim Koller, and David Wessels.