​​Average Stock Market Return

What is the Average Stock Market Return?

The average stock market return is a calculation that indicates how an index has performed over specific time frames. It gives investors an idea of the broad past performance and what they could potentially expect from the index over longer time horizons.

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However, it’s important to note that even though an index may have delivered double-digit returns over several decades, the performance of individual years can vary enormously.

Techopedia Explains the Average Stock Market Return Meaning

Techopedia Explains the Average Stock Market Return Meaning

The clearest average stock market return definition is that it’s a calculation that examines the returns generated over a specific period. It tells investors whether it has generally increased – or decreased – in the past and can help them decide whether it’s an attractive investment.

How is Average Stock Market Return Measured?

There is a basic calculation that can be made when you’re looking at the average returns of stock markets. This involves adding the annual returns over a set number of years – and dividing by the number of those years.

How Average Stock Market Return Measured
Source: Corporate Finance Institute

Let’s look at the annual returns of a hypothetical index – or asset.

Year Return
2023 20%
2022 15%
2021 18%
2020 -10%
2019 15%

The annual average return would be (15% – 10% + 18% + 15% + 20%) divided by 5 = 11.6%

Historical Average Stock Market Returns

The average stock market returns by month can vary enormously – but it can be a similar story when it comes to an annual analysis.

A prime example is the S&P 500 historical returns.

While the average annual return has been between 9% and 10% over recent decades, the performance of individual years has varied enormously.

Historical Average Stock Market Returns
Source: Macrotrends

It’s why average stock market returns don’t always give a good picture of what you might receive in any one year, according to James Norton, head of financial planners at Vanguard Europe. “Market returns move around their averages from year to year – sometimes sharply, as in the case of shares,” he wrote. “But while shares tend to bounce around more than bonds and cash, they also tend to return more than bonds and cash over the long-term.”

He cited the performance of the FTSE All-World Index as an example. While the average annual return since 1993 has been 9.3% in sterling terms, it’s rarely delivered that figure in any one year.

FTSE All-World Index
Source: Vanguard

Average Stock Market Returns and Inflation

Inflation, which measures how the prices of goods and services increase over time, can affect average stock market returns.

It can often have a negative impact, as inflation will make everything more expensive and potentially deter customers from buying. This will mean companies making less money.

Unfortunately, the relationship between inflation and average stock market returns isn’t always clear-cut because there are so many variables at play.

For example, if inflation is pushing up the price of something that customers have to buy – such as energy – then this can be a positive for companies involved in that sector.

However, the impact will also depend on whether firms have experienced an increase in the price of their costs.

Average Stock Market Returns and Volatility

Volatility is one of the most significant factors you’ll face when it comes to average monthly stock market returns. The definition of volatility is the extent to which the price of an asset fluctuates over time. Higher volatility implies there could be larger price swings.

The problem is that stock markets are notoriously volatile. You only have to look at the S&P 500 average return. Its best years have seen it return more than 30%. However, it lost almost 40% at its worst. In other periods it’s barely moved at all.

What Affects the Stock Market?

Many factors can influence stock markets.

Company news

Includes the announcement of quarterly results, the launch of new products, or changes in the management team.

Economic factors

Including interest rate changes, inflation, and the general financial outlook, all of which may influence returns.

Broader trends

These are factors that are likely to influence entire industries. A prime recent example has been the emergence of artificial intelligence (AI).

Analyst sentiment

Market sentiment can be a positive – or negative – factor when it comes to stock markets. How analysts and investors are feeling can affect the performance of indices.

Future Stock Market Growth Predictions

Economists, fund managers, and analysts will all have a view on the likely direction of stock markets over the next few years. They will reach these conclusions by examining the recent performance of shares. For example, has there been a strong rally?

The S&P 500 is expected to finish this year above the 5,000 mark as it remains unclear when the Federal Reserve will begin cutting rates, according to a poll by Reuters.

The median forecast of 40 strategists suggested the benchmark US index will be at 5,100, which is roughly the level it’s reached in recent weeks.

Future Stock Market Growth Predictions
Source: Investing.com

The Bottom Line

While the average annual stock market return of the S&P 500 index is around 9% to 10%, it’s not been quite so clear cut over shorter time frames.

In some years, it’s increased by more than 30% up; in others, it’s down by almost 40%. There are also plenty of years where it’s barely moved at all. That’s why looking at the average stock market returns of an index should only give you a guide as to what’s happened in the past.

FAQs

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Rob Griffin
Financial Journalist

Rob is a seasoned journalist with over three decades of experience spanning across business and finance journalism. Before embarking on a freelance career in 2002, he contributed his expertise to the business desks of notable publications such as the The Guardian, Yorkshire Post, Sunday Business (now Business Post), and Sunday Express. Throughout his freelance journey, Rob has been a regular contributor to a wide range of national newspapers, consumer magazines, trade publications, and websites. His work has appeared in titles such as The Independent, Citywire, Daily Express, FT Adviser, and Sunday Telegraph, covering an array of subjects from market trends…