Momentum Meets Mean Reversion

By LaRue Gibson on November 3, 2025

A century of market history shows a consistent rhythm: when the S&P 500 posts extraordinary trailing three-year performance, investors often celebrate just as the odds for future gains begin to diminish. Our review of data from 1928 through September 2025 reveals a recurring pattern—strong short-term momentum followed by notable mean reversion over the next one to two years.

The S&P 500 most recently entered the top decile of three-year trailing performance on September 18, 2025, signaling a level of investor optimism that history suggests may warrant restraint.

The Present Moment: Entering the Top Decile

As of late September 2025, the S&P 500’s rolling three-year return ranks among the top 10% of all observations since 1928. This achievement reflects an extended stretch of strength but also places the index in rare historical company.

While enthusiasm tends to run high when markets reach this echelon, history advises a more balanced view. Markets rarely maintain this pace. Positive past performance often coincides with stretched valuations, narrowing breadth, and a fading cushion for error.

Historical Context: Strong Past Returns, Weaker Forward Gains

History does not always repeat, but it often rhymes—and in this case, the rhyme is consistent. When the S&P 500 enters its top-performance decile, forward returns tend to taper sharply after an initial continuation phase.

The short-term picture remains constructive: markets often carry recent strength for several months after entering the top decile. However, the 12- and 24-month horizons consistently show below-average returns as markets consolidate or correct. In other words, the stronger the preceding run, the more likely investors will face a period of digestion ahead.

Interpreting the Signal: What Investors Should Consider

This pattern underscores a central principle of market behavior—momentum fades as valuation and optimism peak. Strong trailing gains can create complacency, while reversion quietly reshapes expectations.

For investors, this environment calls for discipline and prudence, not exuberance. Strategies emphasizing balance, diversification, and liquidity may help navigate the likely consolidation phase. Historical evidence does not forecast immediate weakness, but it does warn that the next one to two years may deliver more modest results.

Conclusion: The Case for Tempered Expectations

The data from 1928 through 2025 tells a clear story. The market’s entry into the top decile of trailing three-year performance often marks an inflection point—not necessarily the end of a bull market, but the beginning of a transition to slower, more uneven returns.

Investors should recognize that the strongly positive gains of the past three years are unlikely to persist at the same pace. History suggests that this is a moment to consolidate gains, review allocations, and reaffirm discipline rather than chase recent performance.

Of course, past performance does not guarantee future outcomes.

Methodology

We analyzed daily closing price data for the S&P 500 Index from January 3, 1928, through September 30, 2025. Rolling three-year returns were calculated using a 756-trading-day lookback. These returns were ranked into deciles, with the first decile representing the top 10% of trailing performance. We then measured forward returns for 6 months (126 days), 12-month (252 days), and 24-month (504 days) periods to assess performance trends following each decile event.

Data Source: Bloomberg Finance L.P. (2025.09.30)

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