You’ve probably heard the number before. "The market returns 10% a year." It’s the golden rule of thumb, the bedrock of every retirement calculator, and honestly, the reason most of us feel okay about dumping money into a 401(k). But if you’ve actually looked at your brokerage statement lately, you know that "average" is a bit of a ghost. It exists on paper, but you rarely ever see it in the wild.
The average return of the S&P 500 is actually a collection of wild swings, boring plateaus, and the occasional heart-stopping drop. Right now, in early 2026, we are coming off a three-year heater that has completely skewed what people think is "normal." If you’re trying to plan your life based on these numbers, you need to know which version of the average actually matters for your wallet.
The 10% Myth vs. The Reality of Volatility
Let's look at the raw data. Since its inception in 1928, the S&P 500 has averaged an annual return of about 8.5% to 10.5%, depending on exactly which day you start the clock. If you look at the period since the index expanded to 500 companies in 1957, that average settles right around 10.2%.
Sounds great, right?
But here’s the kicker: the market almost never actually returns 10% in a single year. In fact, since the mid-1920s, the index has only finished a year with a return between 8% and 12% a handful of times. Usually, it's either up 20% or down 15%. It’s a bit like saying the "average" temperature in a desert is 75 degrees because it’s 120 at noon and 30 at midnight. You’re never actually comfortable.
Take a look at the last few years to see how weird this gets:
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- 2023: A massive 26.3% jump.
- 2024: Another huge year at 25.0%.
- 2025: A solid 17.9% gain.
- 2026 (YTD): We’re seeing a bit of a cooling period, with analysts like those at Goldman Sachs and BMO Capital forecasting around a 10% upside for the full year.
When you’ve just lived through three years of double-digit gains, a 10% return starts to feel like a failure. It’s not. It’s actually the market finally acting "normal."
Inflation: The Silent Return Killer
If you’re celebrating a 10% return, you’re only looking at the "nominal" number. You can't spend nominal returns. You spend purchasing power.
When you adjust the average return of the S&P 500 for inflation, the numbers get a lot humbler. Historically, the "real" return of the stock market—what’s left after the cost of living eats its share—is closer to 6.5% to 7%.
Think about 2025. While the S&P 500 was up nearly 18%, the "One Big Beautiful Bill Act" and various tariff shifts caused some price ripples. If inflation is running at 3% or 4%, your 18% gain is actually worth significantly less in the real world. For long-term planning, using a 7% real return is much safer than banking on that 10% headline number.
Dividends: The Secret Sauce
Most people just look at the price of the index. They see the S&P 500 hit 6,900 and think that’s the whole story. It’s not.
Dividends have historically accounted for about 34% of the total return of the S&P 500. If you aren't reinvesting those dividends, you aren't getting the "average" return everyone talks about. You’re leaving a massive chunk of money on the table. Over the last 30 years, the index returned about 8.4% annually on price alone, but that jumped to 10.4% once you factor in reinvested dividends.
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Why 2026 Feels Different
We are currently in a very specific type of market. The "AI buildout" that dominated 2024 and 2025 is starting to mature. According to recent research from Fidelity, about 60% of US GDP growth recently has been tied to AI infrastructure.
This has created a "heavy" index. A few giants like Nvidia, Microsoft, and Broadcom are doing the heavy lifting. In 2025, just seven stocks were responsible for over half of the index's total gains.
This matters because if those seven stocks stumble, the average return of the S&P 500 will tank, even if the other 493 companies are doing just fine. We call this "market breadth," and right now, it's a bit thin.
The "Sequence of Returns" Trap
The average doesn't care about your timeline. You should.
If the market averages 10% over 10 years, but the three years of "down" happen right when you retire, you're in trouble. This is the flaw in the "average" logic. Someone who invested from 2010 to 2020 had a much better experience than someone who invested from 2000 to 2010 (the "Lost Decade"), even though the long-term historical average eventually evened out.
Actionable Insights for Your Portfolio
So, how do you actually use this information without getting paralyzed by the data?
- Stress-test your retirement plan at 6%. If your plan only works if the market hits 10% every year, your plan is broken. Use a conservative "real" return of 6% or 7% to account for inflation and fees.
- Check your "Magnificent" exposure. Since the S&P 500 is market-cap weighted, you might be more concentrated in tech than you realize. If you want a "truer" average of the 500 companies, look into an equal-weight S&P 500 ETF (like RSP).
- Reinvest by default. Ensure your brokerage account is set to automatically reinvest dividends. Without this, you're missing out on a third of the market's historical power.
- Ignore the "per annum" noise. Expecting 10% this year just because it’s the average is a gambler’s fallacy. Prepare for +/- 20% swings while keeping your eyes on the 20-year horizon.
The market is currently hovering near all-time highs, and while Wall Street is calling for another 10% gain in 2026, remember that the "average" is just a destination. The ride there is almost always bumpy. Stop looking for the 10% year and start building a portfolio that can survive the -20% ones.
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Success isn't about hitting the average every year; it's about staying invested long enough for the average to eventually find you.