By Tim Courtney, Chief Investment Officer

If we look back at now a century of U.S. large company stock performance, we see they have produced an average return of a little over 10% per year.¹ But you also see virtually the same 10% average showing up in other, sometimes surprising, contexts too.

The average return for the five years after the market notches a new all-time high is 10% per year.² The average return for the five years after the market falls at least 20% is 10% per year too.² The average return in the three years following the start of a recession? It is slightly over 10% per year.³ 10% average return is a figure that shows up again and again. It is a good starting place as an estimate for future expected returns from US large stocks. But while this seems simple and straightforward there is another way to see stock market returns.

Reviewing a century of return data you will find that you can cherry pick distinct periods of both great outperformance and underperformance. US large caps generated well below 10% annual returns from 1929-1941, 1969-1978, and 2000-2009 - all periods which began and ended with downturns.⁴ Returns were from low single digits per year to negative. But outside of those underperforming periods returns averaged 14% per year or better.⁵

Looking at it this way, stock returns seem to come in either feast or famine cycles. Both the 10% average view and the boom or bust cycle view come from the same data, and both can be true. But we shouldn’t let the cherry-picked periods determine our investing decisions.

First, most of us won’t be investors for only 10 or 15 years. Most of us will be investors for several decades and will continue investing through retirement which will last 25 years or longer. The worst 25-year return for US large caps is just under 6% per year with the best at just over 17%.⁶ The average 25-year annualized return? You guessed it, 10%.⁶

Second, a diversified investor would have fared better during those underperforming cycles. Holding a mix of bonds, value stocks, small cap stocks, international companies, real estate, and other assets provided better outcomes than concentrating solely in US large cap stocks.

What to make of a market that looks like 10% is a reliable number but also contains prolonged periods of poor performance? The two go together. Investors didn’t get the 10% for free, and volatility and prolonged downturns are the cost of admission. Someone entering retirement at 60 to 65 with a 30-year investment horizon might expect a return close to 10% but will likely see two or three meaningful bear markets in that time.

How should we deal with the periods that don’t provide average returns? Timing markets really isn’t a realistic option. Who would have guessed that a great time to enter markets was after the bombing of Pearl Harbor and the US entry into WWII in 1942? Or in 1979 when inflation was 11% and unemployment was 6%? Or in the middle of COVID lockdowns in late March of 2020?⁷ We can better deal with that risk by having a diversified portfolio and a long-term perspective. If you have any questions about this please reach out to your Exencial advisor.

Sources:

1. Nerdwallet (3/4/26) - The Average Stock Market Return: About 10% - NerdWallet
2. Dimensional Fund Advisors (data as of 12/31/25) – S&P 500 Index Returns 1926–2025 (monthly) following Market Peaks and Bear Markets
3. Dimensional Fund Advisors (data as of 12/31/25) – Fama French Total US Market Index 35 month return from start of 16 recessions since 1926
4. NYU Stern (1/5/26) - Historical returns on stocks, bonds and bills: 1928-2024
5. Shillerdata.com (data as of 3/9/26) - US Stock Price, Earnings and Dividends as well as Interest Rates and Cyclically Adjusted Price Earnings Ratio (CAPE) since 1871
6. Dimensional Fund Advisors (data as of 12/31/25) – S&P 500 Index Returns 1926–2025
7. Investopedia (10/25/25) - Understanding Bear Markets: History, Causes, and Opportunities

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