The compounding machine

The S&P 500 is up 16.1% year-to-date as of yesterday’s close. Barring a correction in December, 2025 will be one of the green years in this 150-year history of S&P 500 returns. Once again, it was a year full of drama: geopolitical tensions, tariffs and trade negotiations, and ongoing debates about the Fed.

We are currently bombarded with forecasts from major investment banks about where markets will go next. In 12 months, many of these predictions will have proven wrong. Short-term forecasting is hard; what we do know is that the stock market is a powerful compounding machine. The rare years of extreme negative returns, like 1931 or 2008, interrupt this compounding but do not break the machine.