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The S&P 500 experienced a volatile start to 2026, declining 4.6% in the early part of the year reflecting a challenging market backdrop. However, sentiment shifted meaningfully in April, with the index rebounding by 10.4%. This recovery highlights not only the market’s resilience but also raises questions about the underlying quality of returns—specifically, how much risk investors have taken to achieve them.

The chart below illustrates the Annualized Rolling 3-Year Sharpe Ratio (SR) for the S&P 500. The Sharpe Ratio is a widely used measure of risk-adjusted performance, capturing how much excess return an investment generates per unit of risk. A higher Sharpe Ratio indicates more efficient performance.

The calculation is derived through three steps:

1. Annualizing the S&P 500’s 3-year rolling average monthly excess return, measured relative to the risk-free rate (proxied by the 10-year U.S. Treasury yield)
2. Annualizing the 3-year rolling standard deviation of those excess returns
3. Dividing the annualized return by the annualized standard deviation to produce the Sharpe Ratio

Historically, the post-2011 period has been characterized by a favorable backdrop for equities, with generally strong risk-adjusted returns. More recently, however, the Sharpe Ratio has shown a notable acceleration, remaining consistently above 1.0 for much of the past year—an indication of strong and sustained performance efficiency.

A closer look at the more recent period provides additional insight into what is driving this improvement. The decomposition of the Sharpe Ratio into its two components—returns and volatility—reveals a meaningful shift beginning in mid-to-late 2024.

1. The annualized standard deviation (volatility) has steadily declined since mid-2024, pointing to a more stable market environment
2. At the same time, annualized excess returns began to rise in late 2024, further enhancing overall performance

This combination of rising returns and falling volatility has driven a significant expansion in the Sharpe Ratio. While there has been some moderation in recent weeks, April’s strong 10.4% gain has pushed the Sharpe Ratio back higher, with the current reading around 1.1. Notably, this places the present level in approximately the 92nd percentile since 2022, underscoring how elevated risk-adjusted returns remain compared to recent history.

The recent rise in the Sharpe Ratio reflects a favorable alignment of improving returns and declining volatility, signaling an efficient risk-return tradeoff for investors. While short-term fluctuations may persist, the broader trend suggests that the market continues to operate in a relatively high-quality performance regime compared to the past several years. If you are seeking broad exposure to the S&P 500, you could consider:

The State Street SPDR S&P 500 ETF Trust (SPY) is up 5.9% year-to-date, after rebounding in the month of April. SPY maintains a strong fund score of 5.10, with a positive score direction of 0.69. The fund sits on two consecutive buy signals, after completing a double top break at $700, and hit a new intraday all-time high above $720 (5/1). The weekly OBOS indicates that the stock is in overbought territory, so wait for a near-term pullback before considering. Initial support is at $630, with additional strong support at $510.

With the start of May, we have also officially moved into the “seasonally weak” half of the year, which lasts from May through October. We are all familiar with the saying "sell in May and go away," which proposes that portfolio growth would do just as well if all holdings were sold as they would be if invested in the market from May through October. Typically, conjecture doesn’t mature into an adage without basis and market seasonality is just such an example as it has shown an impressive trend in terms of magnitude, consistency, and longevity. We’ve discussed seasonality many times over the years and as we switch between seasonally biased periods, we wanted to revisit the subject today.

The end of trading on Thursday, April 30th brought the end of the seasonally strong period, which began with the close of the market on Friday, October 31, 2025. Over this period, the Dow Jones Industrial Average (.DJIA) returned 4.39%, which was below average for the “seasonally strong” period.

Years ago, we began using the Stock Trader's Almanac, a reference tool published by Yale Hirsch that has been a fantastic source of information on the stock market ever since. In fact, we always order several copies for the office each year (if you would like a copy, you can visit www.stocktradersalmanac.com). The premise of the "Market Seasonality" study is that historically speaking, the market performs far better during the November to May period than it does from May to November. On its own, that isn't a particularly profound statement, however, when we examine the magnitude of this effect over the years, its significance becomes clear. Consider this: if you had invested $10,000 in the Dow Jones on April 30 and sold it on October 31 each year since 1950, your cumulative return would be only about $15,919. Meanwhile, the same $10,000, invested only during the seasonally strong six months of the year, would now be worth over $1.3 million. Put another way, almost all the growth of the Dow since 1950 has effectively occurred during the "good" six months of the year.

In the graph below, we have reproduced the US Market Seasonality strategy that was first published in the Stock Trader's Almanac beginning in 1950 based upon the Dow Jones Industrial Average. The purple line reflects the seasonally weak period, while the green line shows the seasonally strong six months. You will note that a theoretical $10,000 initial investment in 1950 is barely on the positive side when invested only from May through November. On the other hand, an identical $10,000 initial investment grew to over $1.3 million with an average annualized return of 6.70% if invested only from November through May each year.

Market Seasonality Notes

• Since April 28, 2000, the Dow has gained more than 362%. However, the Dow is up only about 42% if we isolate only the seasonally weak periods over the same timeframe.
• During the seasonally weak May to November periods, 29 out of the 76 years examined finished down, while there were only 17 years during which the seasonally strong period produced a negative return.
• The best strong seasonal period came in 1986 as the Dow gained over 29%, while the worst seasonally strong period came in 1970 at a 14% loss.
• The best seasonally weak period came in 1958 at a 19% gain. Only eight of the past 76 weak periods have seen double-digit gains. With the most recent occurrence last year when the Dow gained 16.95% from May through October, making a second seasonally weak period in a row to see double-digit gains.
• The worst seasonally weak stretch came in 2008 when the Dow lost over 27%. There have been eleven seasonally weak periods to lose more than 10%, with 2008 being the last occurrence.
• 2022’s loss during the seasonally weak period ended a six-year streak of positive returns from May through October, tied for the longest streak of positive “weak” periods in our study timeframe (also 1950 – 1956).
• Only seven weak periods have seen back-to-back negative returns, which last occurred from 2022 - 2023. The longest stretch of consecutive losing weak periods was three years from 1977 – 1979.

We acknowledge that this study is not a sophisticated tool for risk management, but it is interesting and does expose biases within the market. As mentioned above, we are coming off a seasonally “strong” period which the Dow performed below average at 4.39%. As we enter the seasonally weak period, most US equity indices have seen a notable rebound to new highs through April off the March 2026 lows. With the ongoing geopolitical tensions in the Middle East and economic uncertainty, expectations of potential bumpiness through the summer months wouldn’t be out of the realm of possibility. The weight of positive evidence for U.S. equities currently provides some confidence moving into the seasonally weak period.

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