By: Ronald J. Ryan, CFA, Chairman, Ryan ALM, Inc.

Most asset allocation models use the historical mean average for each asset class as the basis for predicting future average returns… in particular, the Return On Assets (ROA) forecast. Currently, most ROAs are in the 6.50% to 7.00% range. A discipline commonly used is the “reversion to the mean”. This principle suggests that any current annual returns that deviate from the historical mean return (outliers) would be corrected over the near-term to conform or revert to the mean. Perhaps that is what is happening in 2025 to the stock market.

The historical (beginning 12/31/69) mean returns for the S&P 500 as of 03/31/25 are as follows:

Q1’25     2024      2023      5 years    10 years    20 years    30 years

-4.3%    25.0%    26.3%    11.3%       11.4%        11.2%         11.3%

Noticeably, the years 2024 and 2023 seem to be outliers or way above average returns suggesting that they are due for a near-term correction. This pattern was evident in 2022 when the S&P 500 had a correction of -18.1% after the prosperous years of 30.9% (2021), 18.4% (2020) and 31.5% (2019). For 2025 returns to revert to the 20-year mean for the last three years it would need a return of -14.77% in 2025. So far 2025 has produced a return of -4.3% as of March 31 for the S&P 500. So, the question remains… will the S&P 500 continue to revert to the mean?

Thought for the day:  Trees do NOT grow to the sky!