Why I sometimes tell myself average returns are a mirage 🤨
Plus a charted review of the macro crosscurrents 🔀
I got an early copy of Ben Carlson’s new book, “Risk & Reward.” It’s terrific. (And it goes on sale May 12!)
Carlson, of Ritholtz Wealth Management, has a gift for being both entertaining and informative. His accessible writing makes for a casual read, and yet with each page you turn, you get a little smarter about investing.
His book is loaded with helpful charts and graphics. Chapter 14 has one of my favorite visualizations of stock market performance: It’s a plot of the S&P 500’s annual returns since 1928. It’s pretty chaotic.
Some investors may find this scatterplot surprising, especially after hearing the near-constant refrain that the stock market typically returns 8% to 10%. And those figures are true if you average the years out. But almost none of the yearly returns line up in that range.
“Investing in the stock market would be far easier if you could simply bank on 10% each and every year,” Carlson wrote. “Unfortunately, it doesn’t work that way. … You could have periods of multiple down years in a row (like 1929 to 1932) or a cluster of positive years in a row (like 1995 to 1999). There are more gains than losses but no rhyme or reason when it comes to annual stock market returns.”
As someone who’s anxious and finds the investing process to be generally unpleasant, I’m constantly managing expectations. Sometimes, this means deprogramming flawed beliefs born out of faulty assumptions.
One of the bigger flawed assumptions I had to correct was that an average return is something that happens frequently.
In fact, the opposite is true.
“One of the strangest aspects of stock market returns in any given year is how seldom they finish around the long-term average,” Carlson added.
He reviews the history going back to 1928. Instead of quoting too much of his book in this newsletter, I’ll encourage you to pick up a copy and check out his work.
In the meantime, I’ll point you to this visualization shared by Carlson’s colleague Michael Batnick. It shows annual returns in the S&P 500 since 1950, sorted from highest to lowest. In red, you can see instances where the S&P returned 7% to 10%. There are just five.
The lesson: An investor’s long-term returns may reflect the averages we talk about. But that’s only because they’ve experienced a combination of many very strong years, some lackluster years, some negative years, and a very small handful of average years.
Average years are so rare that you might as well treat them like a mirage. Just because you can see them in the math doesn’t mean that they’re likely to be ahead of you in the coming year. Manage your expectations.
That said, as years pass, I think it’s a good exercise to see long-term performance in terms of annualized averages. You may be in the middle of a very strong year or an unusually negative one. But in the context of the past several years, you’re likely to see something that’s a little more average.
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Related from TKer:
Expecting average returns doesn’t mean you should expect average years 🤔
8 chaotic scatterplots — and the bullish quality they all share 🐞
TKer’s 3rd birthday comes with an extraordinarily average stock market stat 📈🎂
Review of the macro crosscurrents 🔀
📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 7,401.50 and a closing high of 7,398.93 on Friday. The index is now up 8.1% year-to-date. For market insights, check out the Stock Market tab at TKer. »
There were several notable data points and macroeconomic developments since our last review:
💼 Jobs were created. According to the BLS’s Employment Situation report released on Friday, U.S. employers added 115,000 jobs in April. This metric has been noisy in recent months, going negative in five of the last 11 months.
Total payroll employment rose to a record 158.7 million jobs in April.
The unemployment rate — that is, the number of workers who identify as unemployed as a percentage of the civilian labor force — stood at 4.3% in April.
The labor market is in decent shape, but clearly isn’t as hot as it was just a few years ago.
For more on the labor market, read: About that ugly Feb. jobs report 📉 and We’re at an economic tipping point ⚖️
💸 Wage growth is cooling. Average hourly earnings rose by 0.2% month-over-month in April. On a year-over-year basis, April’s wages were up 3.6%.
💰 Job switchers still get better pay. According to ADP, annual pay in April for people who changed jobs was up 6.6% from a year ago. That better-pay gap has been cooling a bit in recent months. For those who stayed at their job, pay was up 4.4%, about what it’s been for the past year.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈
💼 Job openings fall. According to the BLS’s Job Openings and Labor Turnover Survey, employers had 6.87 million job openings in March, down from 6.92 million in February.
During the month, there were 7.24 million unemployed people — meaning there were 0.95 job openings per unemployed person. This remains one of the most straightforward indicators of labor demand. However, this metric has returned to prepandemic levels.
For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨 and Revisiting the key chart to watch amid the Fed’s war on inflation 📈
👍 Layoffs remain depressed, hiring remains firm. Employers laid off 1.87 million people in March. While challenging for the people affected, this figure represents just 1.2% of total employment. This metric remains slightly below prepandemic levels.
For more on layoffs, read: Mathematical context can totally change the story 🧮
Hiring activity remains well above layoff activity. During the month, employers hired 5.55 million people.
That said, the hiring rate — the number of hires as a percentage of the employed workforce — is relatively low, which could be a sign of trouble to come in the labor market.
For more on why this metric matters, read: The hiring situation 🧩
🤔 People are quitting less. In March, 3.17 million workers quit their jobs. This represents 2.0% of the workforce. The rate continues to trend below prepandemic levels.
A low quits rate could mean a number of things: more people are satisfied with their job, workers have fewer outside job opportunities, wage growth is cooling, or productivity will improve as fewer people are entering new, unfamiliar roles.
For more on this dynamic, read: The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰
💪 Labor productivity increases. From the BLS: “Nonfarm business sector labor productivity increased 0.8% in the first quarter of 2026 … as output increased 1.5% and hours worked increased 0.7%. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From the same quarter a year ago, nonfarm business sector labor productivity increased 2.9% in the first quarter of 2026.”
For more, read: Promising signs for productivity ⚙️ and The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰
💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 200,000 during the week ending May 2, up from 190,000 the week prior. This metric remains at levels historically associated with economic growth.
Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.766 million during the week ending Apr. 25.
For more on the labor market, read: The next couple of years for the job market could be tough 🫤
⛽️ Gas and diesel prices remain elevated. From AAA: “Drivers are seeing another sharp increase at the pump, with the national average for a gallon of regular gasoline rising 25 cents for the second consecutive week to $4.55. Pump prices are now $1.40 higher than they were a year ago and have reached their highest level since 2022, when the national average peaked at $5.01 per gallon. While crude oil prices dipped below $100 per barrel amid ongoing negotiations to reopen the Strait of Hormuz, gasoline prices continue to face upward pressure from global supply concerns.“
Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.
For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊
🎈 Inflation expectations were mixed as gas price expectations improved. From the New York Fed’s April Survey of Consumer Expectations: “Gas price growth expectations retreated appreciably from a spike in March … Median inflation expectations increased by 0.2 percentage point to 3.6% at the one-year-ahead horizon. They were unchanged at 3.1% for the three-year-ahead horizon and at 3.0% for the five-year-ahead horizon in April.”
👎 Consumer vibes are in the dumps. From the University of Michigan’s May Surveys of Consumers: “Consumer sentiment was essentially unchanged this month, coming in a scant 1.6 index points below April’s reading and comparable to the trough reached in June 2022. While the expectations index inched up, current conditions fell back about 9%, owing to a surge in concerns about high prices both for personal finances as well as buying conditions for major purchases. Real income expectations continued a decline that began in March. About one-third of consumers spontaneously mentioned gasoline prices and about 30% mentioned tariffs. Taken together, consumers continue to feel buffeted by cost pressures, led by soaring prices at the pump. Middle East developments are unlikely to meaningfully boost sentiment until supply disruptions have been fully resolved and energy prices fall.”
For more on consumer sentiment, read: What consumers do > what consumers say 🙊
💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 2.7% y/y in the week ending May 2, according to BAC aggregated credit & debit card data. Ex-gas spending rose by 1.8% y/y. The broad slowdown in the week ending May 2 might be due to volatility around month-end. But with the tax refund tailwind fading, higher gas prices might also finally be taking their toll.“
Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️
🏭 Business investment activity jumps. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — jumped 3.4% to a record $82.96 billion in March.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road.
🔨 Construction spending ticked higher. Construction spending increased 0.6% to an annual rate of $2.186 trillion in March.
🏘️ New home sales rise. Sales of newly built homes increased 7.4%in March to an annualized rate of 682,000 units.
New home sales figures come with a large margin of error. For more on this, read: Mathematical context can totally change the story 🧮
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.37%, up from 6.30% last week. “Recent data points to slightly better conditions for buyers with a boost in new-home sales, median new-home prices being down to their lowest level since July 2021, and higher inventory than in recent years. Together, these trends could modestly ease affordability pressures through the spring homebuying season.“
As of Q4, there were 148.7 million housing units in the U.S., of which 87.8 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🤷🏻♂️ Services activity surveys were okay, could be better. From S&P Global’s April U.S. Services PMI: “Although business activity returned to growth after a small decline in March, it’s clear the pace of growth has kicked down a couple of gears since the start of the year. The survey data are indicative of GDP growing at a modest 1% annualized rate. Growth may weaken further, as service providers are reporting lower inflows of new business for the first time in two years, reflecting an intensifying hit to demand from the war in the Middle East. The direct impact of the war has been most evident in consumer-facing services, as high prices have led to a pull-back in discretionary spending on activities such as holidays and recreation, though transport has also been curbed by high fuel prices and travel disruptions.”
The April ISM Services PMI signaled cooling growth.
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
⛓️ Supply chain pressures are building. The New York Fed’s Global Supply Chain Pressure Index — a composite of various supply chain indicators — jumped in April. While it’s way down from its December 2021 supply chain crisis high, it has returned to its highest level since January 2023.
For more on the supply chain, read: We can stop calling it a supply chain crisis ⛓
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.7% rate in Q2.
For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️
Putting it all together 📋
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been on the rise.
Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation is hovering at near-zero. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.
It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.
Is there a chart that shows 60/40 return dispersion similar to the two you showed for the S&P?