90th Percentile Trailing Three Year Performance

By LaRue Gibson on January 2, 2026

What May Come

Over the past century, periods of strong trailing performance in the S&P 500 have often signaled an inflection point rather than the start of a new surge higher. When the index achieves remarkable three-year returns — ranking among the top 10% of all historical periods since 1928 — investors tend to interpret the strength as validation of future gains. However, history shows that robust past performance often leads to moderated returns over the following one to two years.

The S&P 500’s recent move into the top decile of trailing three-year performance, as of September 18, 2025, underscores the need for perspective. While momentum remains strong in the short run, prior cycles suggest that elevated valuations and sentiment can limit upside potential once the market reaches such historically overextended levels.

Historical Perspective

From 1928 through September 2025, there have been seventy-eight distinct periods when the S&P 500’s trailing three-year performance placed it in the top decile of all observations. In most cases, six-month forward returns modestly outperformed average historical results, but the pattern reversed sharply over longer horizons. Mean reversion — the tendency for extreme performance to normalize — has consistently exerted its pull after periods of exceptional strength.

Average Forward Returns Following Top-Decile Performance

The data show that after entering the top decile of trailing performance, the S&P 500 generated only modestly positive returns over the following six months and meaningfully lagged its long-term averages over the next one and two years.

Six-month forward returns averaged +4.4%, modestly exceeding the all-period average of

+3.9%. Over twelve months, however, average forward returns dropped to +5.5%, roughly 30% below the all-data average of +8.1%. At the two-year mark, the gap widened further —

+8.3% versus +16.1%. This pattern underscores the importance of managing expectations and maintaining discipline as markets mature.

Investment Implications

The present setup resembles earlier periods of market strength that eventually gave way to consolidation. This does not necessarily signal an impending downturn, but rather a phase in which returns may normalize following outsized gains. Investors should recognize that strong trailing returns do not guarantee continued momentum — instead, they often precede periods of more tempered performance.

Conclusion

Today’s robust three-year gains in the S&P 500 highlight both the market’s resilience and the cyclical nature of returns. With valuations elevated and sentiment strong, investors would do well to approach the coming year with prudence. Periods of extraordinary strength often mark transitions, not beginnings. As history reminds us, moderation after excess is the market’s most consistent rhythm.

Looking ahead to 2026, several forces may converge to slow the market’s pace. One of these is the typical pattern surrounding U.S. midterm election cycles. Historically, these years have been marked by larger-than-average drawdowns—often approaching 20%—as political uncertainty, fiscal debates, and investor caution weigh on sentiment. The combination of stretched valuations entering 2026 and the political uncertainty that accompanies a midterm year could together explain why markets may consolidate or retrace in 2026 before resuming a longer-term uptrend once clarity returns.

LRG Wealth Advisors
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