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Following three consecutive years of strong returns for stocks, what should investors expect for stocks in 2022 and beyond?

Above average stock market returns won’t persist indefinitely but continued economic growth and accommodative policy should still favor risk assets.

S&P 500 average returns chart

Fueled by accommodative monetary and fiscal stimulus, strong corporate earnings, and robust economic growth, U.S. equities have posted strong returns thus far in 2021, with the S&P 500 index rising over 26% year to date through December 7. If that advance holds, 2021 would add to the recent string of above-average years for equity markets.

As the chart illustrates, calendar-year returns for the S&P 500 index since 2019 topped both the S&P 500 Index’s 50-year (12%) and 10-year (17%) average annualized returns. Compared to either, recent equity performance has been remarkably strong. That said, equities are not immune to periods of more muted performance even in the context of a bull market and economic expansion. Both 2015 and 2018 were recent examples of mid-cycle lulls in the midst of a record-breaking equity bull market.

Although growth is slowing, the economic outlook today still provides a generally favorable backdrop, which bodes well for the bull market in stocks and other risk assets to continue. But with both fiscal and monetary stimulus set to fade as growth recedes toward long-term trend, a period of market volatility wouldn’t be surprising, particularly with equity valuations stretched. (In fact, we’ve seen some hints of that in recent weeks.) Periods of adjustment aren’t unusual, particularly after strong, extended market advances. Still, there is a tremendous amount of cash on the sidelines waiting to be deployed, much of which could make its way into the markets, providing support on dips.

The bottom line? Continued growth and an accommodative Fed should remain supportive of risk assets, although market leadership could evolve over time and broad market returns could be tempered. Investors should remain mindful that volatility and periods of comparatively muted returns are normal – even in the context of a bull market.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis non-factual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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