Today the S&P 500 set yet another all-time high of 6,359.
As the chart below shows, since 1950 the S&P 500 index has increased by slightly more than 8% per year, from 16.79 to 6359. Add reinvested dividends to this and you get a total return of 11.6% per year, according to Bloomberg. If this price performance continues, and given that the current dividend yield on this index is only 1.2% a year, one could expect an investment in the S&P 500 to produce an annualized total return of almost 9.5% per year going forward. Subject, of course, to violent swings along the way, as the chart makes clear.
Food for thought!
Are SP500 chart returns generally shown without the dividend return component?
ReplyDeleteGenerally, yes - an S&P 500 chart will show the price level and will not consider dividend reinvestment. If you want to see the effect of dividend reinvestment (without taxes and transaction costs) you must look for an "S & P 500 Total Return" chart.
DeleteS&P 500 Price to Sales was 3.169 as of 2025-07-18, according to S&P Dow Jones Indices. Historically, S&P 500 Price to Sales reached a record high of 3.172 and a record low of 0.649, the median value is 1.597.
ReplyDeleteWhen the S&P 500 price-to-sales ratio is at a record high, future 10-year returns tend to be lower than the historical average.
The 9.5% return predicted in the article is wishful thinking.
Details about buying stocks at past market valuation peaks that should apply to 2025:
DeleteThe total return of the S&P 500 lagged Treasury bonds from 1929-1950, 1968-1987, and the 22-year stretch from 1998 to 2020 (3/23/98-3/23/20: 5.27% vs 5.32% annually),
"The words "one could expect" often imply a prediction, but with a nuance of reasonable anticipation or likelihood based on existing knowledge or past experiences." Google AI.
The bull market in the S&P 500 during the 1960s peaked in November 1968.
That would be a much better starting point for comparison with 2025.
The average annual total return of the S&P 500 since November 1968 is approximately 7.78%.
The S&P 500 is generally considered to have entered a secular bull market in 1950. The data from 1950 through 2025 starts with a secular bull market and ends at a record stock market valuation. That start and end point exaggerate the long term stock market return. The S&P 500 index has historically delivered an average annual return of roughly 10%, including dividends, when considering long-term performance. The S&P 500 index was first calculated on March 4, 1957. There was no S&P 500 index in 1950.
9.5% is like saying stocks are always in a bull market.
Note my wording: "one could expect ... a total return of 9.5%". This is not a prediction.
ReplyDeleteM2 is growing at a 5 percent rate. But that masks the composition of the money stock. Means-of-payment money is growing at a 9 percent clip. The FED is not tight. If you lower policy rates lower than NIMs then bank credit will accelerate.
ReplyDeleteConsidering all the (self-defeating) complexity (e.g. QE) the Fed has introduced since the .com bust, running the whole policy is understandably difficult.
ReplyDeleteThe Taylor Rule has been modified over the years, and because of the complexity, it's hard to take any model too literally. Two of the Taylor Rules say Fed rates are about right here.
If I just take an amateur look at the bond & interest rate charts, it looks like the Fed should ease their rates a bit (not 3 points, though).
https://www.atlantafed.org/cqer/research/taylor-rule
Estimate for gdp tomorrow is 2.3 percent. Atlanta gdpnnow is at 2.9 percent.
ReplyDelete