When Exceptional Market Gains Signal Caution: What S&P 500's 78% Three-Year Surge Tells Investors

The Market’s Current Hot Streak Breaks Historical Norms

The S&P 500 has delivered remarkable performance over the past three years, climbing nearly 78% from 2023 through 2025. This extraordinary run significantly exceeds the index’s historical average annual return of approximately 10%. Specifically, 2025 saw a 16% gain, while both 2024 and 2023 delivered returns exceeding 20% each year. Such sustained outperformance across three consecutive years represents a rare market phenomenon that warrants deeper examination.

A Pattern That Repeats, Then Reverses

Sustained periods where the S&P 500 rises more than 75% over three years occur infrequently throughout market history. The previous two instances provide illuminating lessons about what followed these peaks.

The 1999 Precedent

At the close of 1999, the index had accumulated a three-year return of approximately 98%. The preceding years—1998 and 1997—also showed three-year returns well above 90%, as the market enjoyed five consecutive years of annual gains of at least 19%. Yet this euphoric period preceded the devastating dot-com crash. Beginning in 2000, the index endured three consecutive years of declines exceeding 10% annually. Before 1999, similar explosive three-year rallies hadn’t occurred since the 1950s.

The 2021 Experience

The most recent comparable period unfolded in 2021, when meme stock mania captured investor imagination and drove the index up nearly 27%. Combined with 2020’s 29% gain and 2019’s 16% return, the three-year cumulative performance reached just over 90%. This represented extraordinary market enthusiasm. However, 2022 brought harsh correction. Inflation concerns sent the index plummeting 19%. Recovery eventually came through artificial intelligence investments and ChatGPT adoption, helping stabilize markets in 2023.

The Investor’s Dilemma: Selling May Cost You More Than Holding

The historical precedent invites obvious questions: should investors exit the market during such strong rallies to avoid inevitable downturns? The evidence suggests caution against this approach.

Consider the 1990s pattern. Had an investor sold after observing three straight years of 20%+ returns at the end of 1997, they would have forfeited the substantial gains that materialized in 1998 and 1999. Timing market peaks remains notoriously unreliable, even in retrospect. The world’s most successful investors deliberately avoid attempting to predict turning points with precision.

Strategic Rebalancing Over Market Timing

Rather than abandoning equities entirely, a more prudent approach involves strategic portfolio management. Investors might consider reallocating capital away from overvalued holdings toward more reasonably priced alternatives that offer reduced downside exposure. Dividend-focused stocks warrant particular attention, as they provide income stability and potential downside cushioning during market corrections.

Complete market exit carries its own risk: regret and opportunity cost. Missing just the strongest market days can substantially diminish long-term returns. The discipline of staying invested while adjusting positioning has historically served investors better than attempting to predict market reversals based on valuation metrics alone.

The S&P 500’s exceptional 78% climb over three years demands respect, but not necessarily fear. History suggests booms are followed by busts, yet rushing to the exits too early often proves more damaging than patient portfolio optimization.