Did you know that If you had invested $100 in the S&P 500 at the beginning of 1957 and reinvested all dividends, your investment would be worth $76,135.59 by the end of 2024? This represents a total return of 76,035.59%, or an annual return of 10.36%.
Adjusted for inflation, this investment outperforms, yielding a cumulative return of about 6,723.23%, or 6.47% annually.
Given this outstanding S&P 500 performance over the years, the question asked by many is whether the index is “doomed” to always rise.
What is S&P 500?
The S&P 500, short for Standard and Poor’s 500, is widely considered one of the best indicators of the U.S. equities market. This world-renowned index includes a representative sample of the 500 leading companies across key industries in the U.S. economy.
The S&P 500’s history dates back to 1923 when Standard and Poor’s introduced an index of 233 companies. It evolved into its current form in 1957, expanding to include 500 companies.
Below, you can find a chart of the S&P 500 performance in real returns since this change has taken effect in 1957:
Source officialdata.com
Is the S&P 500 index biased to rise forever?
Many will argue the S&P 500 is constructed to rise constantly. So, let’s understand the reasons that might validate this argument with the following analogy:
Economic Growth: driving towards prosperity
Imagine the index as a red convertible cruising along the open roads of the U.S.
The driver is always looking ahead, adjusting their driving based on expectations. Similarly, the market anticipates future company performance and sets prices accordingly.
Typically, the expectation is for overall economic growth. One key indicator of this is Gross Domestic Product (GDP), which measures the value added through the production of goods and services within a country over a certain period.
As seen in the chart below, over the last five years, GDP increased in 16 quarters and decreased in only 4 quarters. Remember, a recession is defined as two consecutive quarters of negative GDP growth. Thus, while there were two recession periods (COVID-19 in 2020 and the 2022 stock market decline), the economy has since recovered and continued to grow. As such, the S&P 500, like any other stock market index, follows economic growth and the general economic health of a country or a region.
Source tradingeconomics.com
S&P 500 Rebalancing: fine-tuning for optimal performance
Consider index rebalancing as the process of fine-tuning this convertible for optimal performance. Just as a car needs occasional maintenance and part replacements to run smoothly, the S&P 500 periodically adjusts its components.
Some new companies are added to the index while others that are not performing so well are removed, ensuring that the index stays aligned with the evolving market environment.
This rebalancing act, done quarterly for the S&P 500, mirrors the process of swapping out old car parts to keep the vehicle driving better and faster.
Growth Over Time: fueling the market’s journey
Now, let’s imagine that real market indicators such as sales, company earnings, and other financial activities act as the fuel propelling our red convertible market.
Similar to a car relying on fuel to move forward, the market depends on the genuine financial activities of S&P 500 companies to push stock prices higher. Simply put, when the market experiences a rise in genuine financial activity per share, it’s like injecting high-octane fuel into our convertible.
This injection of fuel enhances investor confidence, moving stock prices upward and maintaining the market engine’s smooth operation.
In the chart below, we observe the S&P 500 sales per share over the past 20 years. As of December 31, 2023, the S&P 500 Sales per Share was $490.20. Despite the 2008 credit crisis and the COVID-19 pandemic in 2020, the overall trend has been upward over the last two decades.
Source gurufocus.com
Summary – Why should you invest for the long-term in the S&P 500?
In this article, we highlighted three reasons why the S&P 500 tends to rise, though this list is not exhaustive.
Numerous factors contribute to the index’s growth, including the influence of major market players such as pension funds, investment banks, and retail investors. Moreover, the increase in global population is another major factor for stock markets to continue rising. More people means more demand, consumers, and workers.
As the economy grows, more money flows into these entities, driving the index higher. Additionally, the Federal Reserve’s monetary policy, which regulates U.S. money flows, consistently monitors indicators that ultimately help to stimulate economic growth for example by printing money.
Reflecting back, I wish someone had shared this insight with me when I was 20 years old…
Understanding the long-term power of the S&P 500 to consistently reach new highs is invaluable. Despite occasional setbacks and the need to hit the brakes from time to time, these pauses are just brief interruptions.
In sum, the S&P 500 index is like a red convertible that sometimes needs to slow down to navigate obstacles but ultimately continues driving toward the sunset. Perhaps that’s the original intent and the destiny of the largest stock index of the largest economy in the world.
Disclaimer:
The information provided in this article is for educational and informational purposes only and does not constitute financial advice. The content is based on personal opinions and experiences and should not be considered as professional investment advice. All investments carry risks, including the potential loss of principal. Always conduct your own research and seek advice from a qualified financial advisor before making any investment decisions. The author and the website disclaim any liability for any loss or damage incurred as a result of using or relying on the information provided in this article.
