U.S. large-cap equities, measured by the S&P 500 index, have outperformed other equity classes over the past 10 years. While analysts expect rapid earnings growth this year, there are downside risks that could negatively hurt returns given the richer valuation, including geopolitical tensions, higher tariffs and elevated inflation that causes the Federal Reserve to reverse course and take a more hawkish approach.
Yearly review: The S&P 500 has outperformed other major indexes in six out of the past 10 years. In the previous two years, the large-cap U.S. stock index handily beat the Russell 2000, MSCI Emerging Markets and MSCI World ex-U.S. indexes. The S&P 500 returned 1.2% year-to-date through Jan. 15.
Annual index returns*
Risk-adjusted returns: The S&P 500's 13.1% annualized return over the last decade easily topped the other equity markets. The second-highest return came from U.S. small caps, with the Russell 2000 returning 7.8%. With 15.4% volatility, the S&P 500 produced a much higher risk-adjusted return than the others.
10-year index returns and volatility
Expected earning growth: Analysts expect the S&P 500's quarterly earnings growth to accelerate. The consensus estimate shows a nearly 12% year-over-year increase in the fourth quarter. Analysts project double-digit year-over-year percentage increases over each of the next four quarters.
Year-over-year S&P 500 earnings growth**
High growth expectations: With the S&P 500 trading at a historically rich multiple, the market has priced in high growth expectations. The index trades at a trailing price-to-earnings ratio of about 28, compared with the 10-year average of 22, seemingly leaving little room for error if certain events, such as slower earnings growth, materialize.
S&P valuation
*Data for 2025 is as of Jan. 15. **Figures for Q4 2024 through Q4 2025 are consensus estimates. Sources: Bloomberg, FactSet