The equity market has performed well over the last 10 years, with the S&P 500 Index generating a total return of about 13% per year. That means $1 million invested in 2014 would be worth $3.4 million today. Given this strong performance, above the long-term trend of about 10%, does that mean the next 10 years will be weak as the market corrects itself?

This argument can be particularly easy to make during the current economic and political climate. Ukraine continues to fight its war against Russia while Israel is fighting Hamas in the Gaza strip. The shadow war between Iran and Israel recently escalated into direct confrontation. Inflation is still an issue in the U.S. as well as the rest of the world. The current inverted yield curve, with 3-month treasury yields higher than 10-year yields, is not normal and has historically presaged a recession.

The market will correct itself at some point but it’s impossible to time. As a result, a move away from equities is not the best way to grow long-term wealth. Over the last 10 years, there have been times when the market fell significantly- for example, the 20% fall in the first quarter of 2020 because of the COVID-19 pandemic- but staying in the market more than tripled an investors money.

The chart below shows quarterly rolling 10-year returns for the S&P 500 Price Index since 1945 and quarterly rolling annual returns since 1955. The 10-year returns, which don’t include dividends, range from -5% to 17%. The annual returns range from down 41% to up 54%. As one would expect, the annual return range is much wider than the 10-year range. In addition, during those 10-year positive cycles, there can be significant down years. Most recently, the S&P was down 18% in 2022 but was still up 13% annually from 2012 to 2022. The S&P was down 22% in 2002, but that capped a decade of greater than 9% annualized returns.

Short-term volatility does not change the long-term trend of a growing market. The market grows because underlying companies grow their earnings. While the multiple investors are willing to pay for those earnings can change, in general, earnings growth drives the market. Companies are dynamic operations that will adjust to outside forces and allocate capital accordingly. This does not result in straight line upward growth but a long-term trend of high single digit growth. Dividends then add to the total return to result in the referenced 10% return.

The market has had a strong run. There are multiple forces that do not suggest smooth sailing looking forward. However, focusing on the long-term trend of earnings growth driven by the dynamic companies that make up the market, there is confidence that long term wealth creation in the market will continue.