Coinbase, Block and Robinhood meet the criteria for inclusion in the benchmark index. – Photo illustration MarketWatch/iStockphoto
The S&P 500 could soon get a facelift with quarterly index rebalancing on the horizon.
Based on historical trends, the S&P Dow Jones Indices could announce new entrants to the benchmark U.S. large-cap stock index after Friday's close. The index provider would then also announce which constituents are expected to leave the S&P 500 SPX.
Stocks tend to rise when they are announced as future components of the S&P 500, particularly because trillions of dollars are invested in index funds that track the benchmark.
“This means that these index funds have no choice but to buy the stocks that join the index. “so it's a clear source of demand over a defined period of time, from when the announcement happens, to whenever it happens,” which is usually a short window, according to Steve Sosnick, chief strategist at Interactive Brokers.
Usually, announced new entrants are not a surprise, as they are trendy names that just meet the profitability criteria or are among the largest constituents in terms of market capitalization of the S&P MidCap Index 400 MID or the S&P Small Cap 600 SML index. These indices, along with the S&P 500, make up the S&P Composite 1500 Index XX:SP1500.
“Markets are somewhat efficient,” Sosnick said. “They tend to anticipate.”
There are various criteria that companies must meet for initial inclusion in the S&P Composite 1500. These include being domiciled in the United States and posting positive combined earnings per share for the last four reported quarters, while also being profitable for the most recently reported quarter. To be included in the S&P 500, companies must have a market capitalization of $18 billion or more, but market cap thresholds are lower for other indexes.
Various names have been floated as candidates for inclusion in the S&P 500 this time around, including financial technology companies Coinbase Global Inc. COIN and Block Inc. SQ, software company Workday Inc. WDAY and car retailer used Carvana Co. CVNA.
Decisions are made by an indexing committee and they are “more art than science,” according to Sosnick. The S&P 500 is not simply a list of the 500 largest companies by market capitalization. Instead, the committee may seek to avoid particularly volatile items or focus on particular attributes at different times.
Sosnick compared the process to college admissions. “You know what you have to have, but having it doesn’t mean you’re getting into it.” The school might need a new tuba player for the band more than someone with high SAT scores.
In discussing the possibility of Block joining the S&P 500, Bernstein's Harshita Rawat noted that “sector diversification is one of the index committee's considerations, as it aims to maintain a sector composition that is generally in line with the economy.
What “in line with the economy” means isn't perfectly explained, but Rawat pointed out that financial stocks currently make up 13.9% of the S&P 500, compared to 14.6% in the S&P Total Market Index, ” which suggests there is room for more finance as it is underrepresented.
Meanwhile, Oppenheimer's Owen Lau touted Coinbase as a candidate over the summer. It is one of the largest companies, in terms of market capitalization, that meets other criteria but is not yet included in the index.
To capture companies that were possible candidates for inclusion in the S&P 500 but were not yet included in the S&P Mid Cap 400 or S&P Small Cap 600 indices, we began screening with the index constituents Russell 3000 RUA, designed to cover 98% of publicly traded stocks in the United States
It turned out that there were 60 US companies with a market capitalization of $18 billion or more that were not yet included in the S&P 500. Of these, 13 were already included in the S&P Mid Cap 400, and none in the S&P 600. We therefore only applied the profitability tests, described above, to 47 of the companies. Applying the profitability criteria to companies with a market capitalization of $18 billion or more, but not yet included in the S&P Mid Cap 400, brought the list of candidates down to 42 companies.
Here are the 20 largest companies likely to be added to the S&P 500:
Business
Teleprinter
Market capitalization. (in millions of dollars)
Total EPS for the last four fiscal quarters
EPS for the most recent reported fiscal quarter
AppLovin Corp.
APPLICATION
$111,612
$3.30
$1.25
Apollo Global Management Inc.
APO
$98,865
$9.50
$1.29
Southern Copper Company.
SCCO
$80,005
$3.84
$1.14
Coinbase Global Inc.
COIN
$67,813
$5.85
$0.28
Trade Desk Inc. Class A
TTD
$62,731
$0.62
$0.19
Workday Inc. Class A
WDAY
$57,269
$6.03
$0.72
Bloc Inc.
S.Q.
$55,370
$1.78
$0.45
Datadog Inc. Class A
DOG
$51,956
$0.54
$0.14
Chenière Énergie Inc.
LNG
$50,195
$15.68
$3.93
Vertiv Holdings Co.
VRT
$49,124
$1.50
$0.46
Ferguson Enterprises Inc.
FERG
$44,733
$8.53
$2.23
Veeva Systems Inc. Class A
VEEV
$38,498
$3.75
$1.04
Ares Management Corp.
ARE
$35,085
$2.23
$0.55
Carvana Co. Class A
CVNA
$33,429
$0.01
$0.64
Robinhood Markets Inc.
HOOD
$30,543
$0.59
$0.17
Carnival Corp.
CCL
$30,059
$1.12
$1.26
First Citizens BancShares Inc. Class A
FCNCA
$28,538
$174.52
$43.41
GlobalFoundries Inc.
GFS
$24,653
$1.34
$0.32
LPL Financial Investments Inc.
LPLA
$24,479
$13.29
$3.39
Lennox International Inc.
III
$23,708
$21.05
$6.68
Source: FactSet
Click on the tickers to learn more about each company.
It turned out that all 20 companies on the list were larger than any of the 13 companies in the S&P Mid Cap 400, so the profitability test is included in the table.
Carvana makes the list, with an EPS sum of just four quarters in the black. But it was a hell of a year for the stock, which was on the rise. The stock is up 383% for 2024 through Thursday. But to understand the drama, you have to look at a five-year graph. The stock is up 191% over the past five years, but it's been a roller coaster ride. This is a five-year price chart through Thursday:
Five-year price movement for Carvana stock through December 5, 2024. – FactSet
