Vanguard S&P 500 ETF Over the Next 10 Years: What History Says About the Road Ahead

The past decade has been one of the best stretches in the S&P 500's (SNPINDEX: ^GSPC) history. It includes gains of at least 16% in six of the past seven calendar years from 2019 through 2025. 2026's year-to-date return of 11% puts the S&P 500 on pace for its fourth consecutive year of double-digit gains.

The Vanguard S&P 500 ETF (NYSEMKT: VOO) has generated an average annual return of 15.5% over the past 10 years. That's well above the index's long-term average annual return of closer to 10%.

While investors shouldn't assume that the next decade will look like the last one, recent returns don't mean the index is going to lag. But a lot will depend on whether the artificial intelligence (AI) trade eventually cools off and on what happens to inflation, interest rates, and global economic growth.

Image source: Getty Images.

Why the last decade was so good for the S&P 500

A number of powerful catalysts contributed:

• Ultra-low interest rates: The decade started with the federal funds rate near zero. The central bank tried to raise rates steadily in the late 2010s but dropped them back to zero during the COVID-19 pandemic, where they stayed for two years. We got an inflation shock in 2022, partly because of this, but it had already fueled growth and stock prices before then.
• Pandemic stimulus: When it looked like the world was about to end, governments around the world printed trillions of dollars to keep their economies afloat. A lot of the service economy was closed, which led consumers to load up on "things." A lot of that liquidity remains in the system.
• The AI boom: Speaking of trillions of dollars, that's how much big tech companies have spent on AI development over the past few years. The earnings boom resulting from it is expected to continue for at least the next few quarters.

Low interest rates, high liquidity, and a technological revolution have all helped push the S&P 500 higher by more than 300% over the past decade.

The next decade could be tougher

A lot can happen over the next 10 years, but I don't think there's any question that this next decade is starting in a more challenging spot.

• The inflation rate has been well above the Fed's 2% target for the past four years and has shown little progress getting back to it.
• The Shiller CAPE ratio, which measures S&P 500 stock prices against inflation-adjusted earnings over the past 10 years, is near an all-time high. This suggests stocks are very overpriced.
• The Fed could raise rates multiple times over the next six to 12 months.
• There's talk of trying to slow down AI development to let safety measures catch up.

There will probably be some talk along the way about a "lost decade" like the one we saw between the tech bubble and the financial crisis. I'm not sure we'll see that again, but I do think it's reasonable to set expectations lower than this past decade's returns.

The one thing that has happened over the past century is that the U.S. economy continues to find ways to expand. I expect that will happen over the next 10 years as well. It may or may not translate into huge returns for the S&P 500, but investors are likely to be rewarded regardless.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.