The S&P 500 Has Returned an Average of 12.2% Annually Over the Past 10 Years. Here Is What History Says May Happen Over the Next Decade

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It's hard to beat the S&P 500 (SNPINDEX: ^GSPC), the most popular barometer for the U.S. stock market, which returns roughly 10% annually on average to shareholders. The S&P 500 is an index of 500 prominent U.S. companies. It's performed well for so long that even most professional investors can't consistently beat the index by making their own selections.

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The past decade has been especially prosperous -- the S&P 500 has returned an average of 12.2% annually.

But what does that mean for investors moving forward?

History says the stock market may not perform as well over the next decade

Like most things in life, investing has some crucial nuances. The S&P 500's annualized returns are an average. In other words, the returns can fluctuate, sometimes wildly, from year to year or even from decade to decade.

Many factors can affect the stock market's performance, but it goes through ups and downs, depending on how expensive the market is relative to the economy's growth. Data on the S&P 500's rolling 10-year performance over the past 30 years shows that it typically performs worse following periods of higher returns.

The past decade, evidenced by 12.2% annualized performance, has been a lucrative time to invest, but that's also reflected in the S&P 500's valuation.

Data by YCharts.

The market's CAPE ratio, which values the S&P 500 on average inflation-adjusted earnings from the past decade, is near its highest point since the infamous dot-com bubble in 2000. It shouldn't surprise anyone if the S&P 500 declines or plateaus while that valuation reverts toward historical norms.

Could artificial intelligence be a game-changer?

The world is different today from decades ago. Technology and innovation have accelerated, and artificial intelligence (AI) could be humankind's most important creation since the internet.

Even though the S&P 500 looks expensive based on historical data, there's a fair argument that AI could create enough growth to justify higher valuations. The S&P 500 leans heavily into the technology sector, which comprises 30% of the index, including a group of mega-cap technology companies called the Magnificent Seven.

Research from PricewaterhouseCoopers (PwC) estimates that AI will boost North America's economy by 14.5% by 2030. An estimated 45% of that growth will come from how AI enhances existing products and services. If you look further ahead, AI could bring new industries online by 2035, including humanoid robotics and quantum computing.

Image source: Getty Images.

It does look like AI is already well on its way to realizing its potential. AI chatbots like ChatGPT gained popularity in early 2023, and they're reportedly already beginning to affect traditional search engines. The immense resources companies and governments are pouring into AI indicate that things may only escalate from here.

Here's how investors may want to proceed

As exciting as the future could be, it would be wise to remain optimistic but take a measured approach. The timing aspect matters, too. The internet ignited economic growth, but as the dot-com bubble showed, investors were too eager too early.

The effect of market valuations matters most in the short term, and historical data suggest that the stock market may take a breather after a strong decade. Fortunately, the S&P 500 has always delivered if you wait long enough, and AI seems likely to push the economy and stock market to new highs at some point.

The Motley Fool's core investing principles center around diversifying your portfolio, investing for the long term, buying slowly as you add funds, and holding through the volatility. Following these guidelines should help ensure that your stock portfolio will profit from whatever the future holds.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.