The S&P 500 is coming off of a tremendous three-year stretch. How good was it? Historically good. Here is the total return for the index for each of the past three years:
| Year | S&P 500 Total Return |
|---|---|
| 2023 | 26.3% |
| 2024 | 25% |
| 2025 | 17.9% |
That's three consecutive years in which the index returned more than 15%. It was a combination of circumstances that set off this run.
U.S. stocks were coming off a miserable 2022, when the S&P 500 and long-term Treasuries both lost more than 20% from peak to valley. However, a slowdown in inflation and the end of an aggressive Federal Reserve rate-hiking cycle provided some glimmer of hope. By the latter part of 2022, stocks had reached a bottom.
Then 2023 brought the return of conditions that were more favorable, if not ideal, and the beginning of the artificial intelligence (AI) trade. Suddenly, optimism was returning, and it led to a huge rally, especially for the tech sector and its "Magnificent Seven."
Image source: Getty Images.
Three consecutive years of 15%-plus returns in the S&P 500 is actually quite rare. During the past 100 years, it has only happened four other times.
- 2019 (up 31.5%), 2020 (18.4%), and 2021 (28.7%). Yes, the last time this happened was just a few years ago! It would be easy to forget this, given that the pandemic knocked more than 30% off the index in just a couple of months in 2020. But the S&P 500 recovered all of it by August and spent the latter half of the year setting a series of new all-time highs.
- 1995 (37.6%), 1996 (23%), 1997 (33.4%), 1998 (28.6%), and 1999 (21%). The tech bubble, with the birth of the internet, created some of the wildest valuations the market has ever seen. In 2000, it all came crashing down. The Nasdaq 100 ended up losing 80% of its value and brought the index back to 1997 levels.
- 1950 (31.7%), 1951 (24%), and 1952 (18.4%). After World War II, the economy shifted from manufacturing for the war to producing goods for consumers. Wartime restrictions were being lifted, and it led to a period of sustained economic expansion.
- 1942 (20.3%), 1943 (25.9%), 1944 (19.8%), and 1945 (36.4%). The S&P 500 experienced three consecutive down years right before this, so there was some value that was building up. Industrial production was also ramping up, and the economy began expanding steadily.
So what happened after these big bull markets?
SNPINDEX: ^GSPC
Key Data Points
The 1940s bull was followed by a lengthy period of very modest returns. In 1946, the S&P 500 fell by about 8% and only generated roughly 5% returns in both 1947 and 1948. That's a total three-year gain of about 2% to 3%.
Then 1953 started with a correction that knocked 15% off the S&P 500 and a relatively short recession. But from there, it was full steam ahead again. The S&P rose 52% and 31% in 1954 and 1955, respectively.
After the tech bubble, the market didn't hit a bottom for nearly three years. The S&P lost nearly 50%, and the Nasdaq 100, as mentioned earlier, did considerably worse.
After the S&P 500 finished its third straight strong year in 2021, the impact of zero interest rates and a flood of COVID stimulus was finally felt. Inflation surged, the Fed struggled to catch up, and both stocks and bonds moved much lower.
What's the lesson for today?
In general terms, each instance in which the S&P 500 posted three straight 15%-plus years (historically, at least) was followed by either an extended period of minimal returns, a modest correction, and/or an outright bear market. In other words, the good times ended, and a rough stretch followed.
We've also seen these runs extend to a fourth and fifth year, so it's not out of the question that the bull market can roll on. However, given the current path of some economic data, it seems increasingly unlikely in 2026.
Overall, I think investors should at a minimum begin thinking more cautiously. That means considering value stocks, international stocks, bonds, precious metals, or any other strategy that isn't so reliant on tech and growth stocks.
History suggests that the good times are probably ending soon. You don't want to be left holding the bag.
