The S&P 500 could soon get a somewhat fresh look as the index’s quarterly rebalancing looms.
Based on historical patterns, S&P Dow Jones Indices could announce new participants in the major US benchmark index after Friday’s close. The index provider would then also announce the components that will leave the S&P 500 SPX.
Stocks tend to rise when they are announced as future components of the S&P 500, mainly because trillions of dollars have been invested in index funds that track the benchmark.
“It means those index funds have no choice but to buy the stocks that join the index. so it’s a clear source of demand over a period of time, from when the announcement happens, to when it occurs,” which is usually a short time frame, said Steve Sosnick, chief strategist at Interactive Brokers.
Normally, the announced newcomers do not come as a surprise, because they are buzzy names that just meet the profitability criteria or are among the largest components in terms of market capitalization of the S&P MidCap 400 Index MID or the S&P Small Cap 600 Index SML. These indexes, together with the S&P 500, form the S&P Composite 1500 Index XX:SP1500.
“Markets are somewhat efficient,” Sosnick said. “They tend to anticipate.”
There are several criteria that companies must meet to be included in the S&P Composite 1500 for the first time. These include being based in the US and showing positive combined earnings per share over the past four reported quarters, while also be profitable for the most recent reported quarter. To be included in the S&P 500, companies need a market capitalization of $18 billion or more, but for the other indexes the market capitalization thresholds are lower.
Several names have been put forward as candidates for inclusion in the S&P 500 this time around, including financial technology play Coinbase Global Inc. COIN and Block Inc. SQ, software company Workday Inc. WDAY and used car retailer Carvana Co. CVNA
The decisions are made by an index committee and, according to Sosnick, are “more art than science.” The S&P 500 is not simply a list of the 500 largest companies, ranked by market capitalization. Instead, the committee may try to avoid particularly volatile components or focus on certain features at different times.
Sosnick compared the process to college admissions. “You know what you need to have, but having it doesn’t mean you’re ready to come in.” The school may need a new tuba player for the band more than someone with high SAT scores.
In discussing the potential for Block to join the S&P 500, Harshita Rawat of Bernstein noted that “sector diversification is one of the index committee’s considerations, in that they aim to maintain a sector composition that is generally is in line with the economy.”
What “in line with the economy” means isn’t precisely defined, but Rawat emphasized that the financial sector currently makes up 13.9% of the S&P 500, compared to 14.6% in the S&P Total Market Index, “suggesting that there is room for financial services, because they are underrepresented.”
Meanwhile, Oppenheimer’s Owen Lau highlighted Coinbase as a candidate this summer. It is one of the largest companies, measured by market capitalization, that meets other criteria but is not yet included in the index.
See more: Coinbase shares could join the S&P 500 as bitcoin goes mainstream, analyst says
To include companies that were potential 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 indexes, we began by screening against the components of the Russell 3000 Index RUA , which is designed to cover 98% of stocks listed in the US
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. profitability tests described above applied to 47 of the companies. Applying the profitability screens for companies with a market capitalization of $18 billion or more but not yet included in the S&P Mid Cap 400, the candidate list was reduced to 42 companies.
Here are the top 20 companies that may be eligible for inclusion in the S&P 500:
|
Company |
Ticker |
Market capitalization. ($mil) |
Total earnings per share for the past four fiscal quarters |
EPS for the most recently reported fiscal quarter |
|
AppLovin Corp. Class A |
APP |
$111,612 |
$3.30 |
$1.25 |
|
Apollo Global Management Inc |
APO |
$98,865 |
$9.50 |
$1.29 |
|
Southern Copper Corp. |
SCCO |
$80,005 |
$3.84 |
$1.14 |
|
Coinbase Global Inc. |
MINT |
$67,813 |
$5.85 |
$0.28 |
|
Trade Desk Inc. Class A |
T.D |
$62,731 |
$0.62 |
$0.19 |
|
Workday Inc. Class A |
WDAY |
$57,269 |
$6.03 |
$0.72 |
|
Block Inc. |
SQ |
$55,370 |
$1.78 |
$0.45 |
|
Datadog Inc Class A |
DDO |
$51,956 |
$0.54 |
$0.14 |
|
Cheniere Energy 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. |
ARES |
$35,085 |
$2.23 |
$0.55 |
|
Carvana Co. Class A |
CVNA |
$33,429 |
$0.01 |
$0.64 |
|
Robinhood Markets Inc. |
CAP |
$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 Holdings Inc. |
LPLA |
$24,479 |
$13.29 |
$3.39 |
|
Lennox International Inc. |
LII |
$23,708 |
$21.05 |
$6.68 |
|
Source: FactSet |
||||
Click on the tickers for more information about each company.
Read: Tomi Kilgore’s guide to the wealth of information available for free on MarketWatch’s quotes page
It turned out that all twenty companies on the list were larger than all thirteen companies in the S&P Mid Cap 400. So the profitability test is on the table.
Carvana made the list, with four-quarter earnings per share barely in the black. But this was a decent year for the stock, which . The stock rose 383% through Thursday for 2024. But to understand the drama, you have to look at a five-year chart. The stock is up 191% in the past five years, but it’s been a rollercoaster ride. This is a price chart for five years through Thursday:
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