The US stock market is the largest stock market in the world, accounting for 43% of the $106 trillion global stock market last year. U.S. stocks have created substantial wealth over time, something Warren Buffett attributes to a unique combination of commerce and innovation. Currently, 17 of the 20 largest companies in the world are American companies.
The American stock market is divided in different ways, but its performance is primarily measured through three main financial indices: the S&P 500 (^GSPC 1.23%)he Dow Jones Industrial Average (^DJI 1.05%)and the Nasdaq Composite (^IXIC 1.70%).
Those indices share certain stocks in common, but investors view them differently. Continue reading to see how the three indices performed over the past decade as of January 15, 2024.
S&P 500
The modern S&P 500 was launched in 1957, but its roots date back to a precursor index created in 1923. The S&P 500 measures the performance of 500 large American companies that represent a mix of value stocks and growth stocks. The index represents about 80% of domestic stocks by market capitalization, so it is widely considered the best benchmark for the entire US stock market.
The five most important components of the S&P 500 are detailed below:
- Microsoft: 7.1%
- Apple: 6.8%
- Alphabet: 3.9%
- Amazon: 3.5%
- NVIDIA: 3.3%
The S&P 500 returned 163% over the past decade, with a CAGR of 10.2%. Investors can gain direct exposure to the index with the Vanguard S&P 500 ETF (NYSEMKT: FLIGHT). Warren Buffet often recommended that strategy because very few investors manage to outperform the S&P 500. That includes professional money managers. In fact, less than 15% of all large-cap funds outperformed the S&P 500 over the past decade.
Dow Jones Industrial Average
He Dow Jones Industrial Average It measures the performance of 30 large American companies, all of which are typically included in the S&P 500. Selection is limited to companies that meet three criteria: excellent reputation, sustained earnings growth, and widespread interest among investors. For this reason, the Dow Jones is commonly considered a benchmark for frontline stocks.
The five most important components of the Dow Jones are detailed below:
- UnitedHealth Group: 9.4%
- Microsoft: 6.7%
- Goldman Sachs: 6.6%
- House deposit: 6.2%
- Amgen: 5.3%
The Dow Jones returned 131% over the past decade, with a CAGR of 8.7%. Investors can gain direct exposure to the index with the SPDR Dow Jones Industrial Average ETF (NYSEMKT: DAY). While the index has underperformed the S&P 500 over the past decade, it has also been less volatile than the S&P 500 due to its blue-chip composition.
Nasdaq Composite
He Nasdaq Composite It measures the performance of more than 3,000 companies, all of which are listed on the market. Nasdaq Stock Market. The vast majority of its constituents are American companies, although the index offers a small amount of international exposure. The Nasdaq is heavily weighted toward the high-growth technology and consumer discretionary sectors, and is commonly considered a benchmark for growth stocks.
The five largest components of the Nasdaq are detailed below:
- Apple: 12.3%
- Microsoft: 11.5%
- Alphabet: 6.7%
- Amazon: 6.5%
- NVIDIA: 5.1%
The Nasdaq returned 264% over the past decade, with a CAGR of 13.8%. Investors can gain direct exposure to the index with the Fidelity Nasdaq Composite ETF (NASDAQ:ONEQ). As a caveat, while the index has outperformed the S&P 500 over the past decade, it has also been more volatile than the S&P 500 due to its highly concentrated composition.
Patience is key to making profits in the stock market
Investors can learn an important lesson by analyzing historical stock market returns. The three main financial indices have suffered multiple corrections and two bear markets over the past decade, but the S&P 500 and Dow Jones have more than doubled in value, and the Nasdaq has more than tripled.
To facilitate comparisons, I have detailed the returns of the three indices in the table below.
|
stock market index |
10 year return |
Annualized return |
|---|---|---|
|
S&P 500 |
163% |
10.2% |
|
Dow Jones Industrial Average |
131% |
8.7% |
|
Nasdaq Composite |
264% |
13.8% |
Data source: YCharts. Chart by author. As of January 15, 2024.
Here's the bottom line: All three major U.S. stock indexes were profitable investments over the past decade, and investors have no reason to expect a different outcome over the next decade. That means any of the index funds discussed above will likely be a profitable investment for the next 10 years (and beyond).
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Alphabet executive Suzanne Frey is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon, Nvidia and Vanguard S&P 500 ETF. The Motley Fool holds and recommends Alphabet, Amazon, Apple, Goldman Sachs Group, Home Depot, Microsoft, Nvidia, and Vanguard S&P 500 ETFs. The Motley Fool recommends Amgen and UnitedHealth Group. The Motley Fool has a disclosure policy.
