The S&P 500’s quarterly rebalance is approaching, potentially reshaping the benchmark index with new additions. Based on historical trends, S&P Dow Jones Indices may reveal new entrants after Friday’s closing bell, alongside announcements of companies exiting the S&P 500. Inclusion in the index often triggers stock price increases due to the substantial capital invested in index funds tracking the benchmark.
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Index Inclusion: A Catalyst for Stock Performance
The inclusion of a company in the S&P 500 often leads to a surge in demand for its stock. As Interactive Brokers Chief Strategist Steve Sosnick explains, index funds tracking the S&P 500 are obligated to purchase shares of newly added companies, creating a significant and predictable influx of buying pressure within a short timeframe.
While announcements often align with market expectations, the selection process considers factors beyond market capitalization. Companies typically on the radar are those that have recently achieved profitability or rank among the largest components within the S&P MidCap 400 or S&P SmallCap 600 indices. These three indices collectively constitute the S&P Composite 1500.
S&P 500 Inclusion Criteria: More Than Just Market Cap
To be considered for inclusion in the S&P Composite 1500, companies must meet specific requirements. These prerequisites include U.S. domicile, positive combined earnings per share over the trailing four quarters, and profitability in the most recent reported quarter. For specific inclusion in the S&P 500, a market capitalization of $18 billion or more is necessary, while lower thresholds apply to the other indices.
Several prominent names are currently speculated as potential candidates for S&P 500 inclusion. Among them are financial technology companies Coinbase Global Inc. and Block Inc., software company Workday Inc., and used-car retailer Carvana Co.
The Art and Science of Index Selection
The final decision rests with an index committee, employing a selection process described by Sosnick as “more art than science.” The S&P 500 isn’t simply a roster of the 500 largest companies by market capitalization. The committee carefully evaluates potential additions, considering factors such as volatility and specific attributes to maintain a balanced and representative index. This process, Sosnick suggests, mirrors college admissions, where meeting minimum requirements doesn’t guarantee acceptance.
Bernstein analyst Harshita Rawat emphasizes the importance of sector diversification in the committee’s decision-making. The committee strives to align the index’s sector composition with the broader economy. Rawat notes that the financial sector’s current representation in the S&P 500 (13.9%) is slightly below its weight in the S&P Total Market Index (14.6%), suggesting potential room for adding a financial company.
Coinbase, highlighted by Oppenheimer’s Owen Lau as a potential candidate, stands out as one of the largest companies meeting the criteria but not yet included in the index. Lau’s assessment, made earlier this year, pointed to Coinbase’s potential inclusion as Bitcoin gains mainstream acceptance.
Identifying Potential Candidates: A Deeper Dive
To broaden the scope of potential candidates beyond those already present in the S&P MidCap 400 or S&P SmallCap 600, an analysis was conducted using the Russell 3000 Index, encompassing 98% of publicly listed U.S. stocks.
This analysis revealed 60 U.S. companies with market capitalizations exceeding $18 billion not yet included in the S&P 500. Of these, 13 were already part of the S&P MidCap 400. Applying profitability criteria to the remaining 47 companies narrowed the list to 42 potential candidates.
The table below presents the top 20 companies by market capitalization that meet the criteria and could be considered for addition to the S&P 500:
| Company | Ticker | Market Cap. ($mil) | Total EPS (Past 4 Quarters) | EPS (Most Recent Quarter) |
|---|---|---|---|---|
| AppLovin Corp. Class A | APP | $111,612 | $3.30 | $1.25 |
| Apollo Global Management Inc | APO | $98,865 | $9.50 | $1.29 |
| … (and 18 more companies) | … | … | … | … |
Carvana: A Case Study in Volatility
Carvana, despite barely meeting the profitability threshold, made the list of potential candidates. While the company’s stock experienced a significant surge in 2024 (up 383%), a five-year chart reveals a highly volatile trajectory, underscoring the complexities of the selection process.
Conclusion: Anticipating the S&P 500 Rebalance
The upcoming S&P 500 rebalance holds significant implications for investors. While market speculation often centers around potential additions, the final decision rests with the index committee, which balances quantitative criteria with qualitative considerations. Companies like Coinbase, Block, and Robinhood remain in the spotlight, but the ultimate outcome will shape the composition of this crucial benchmark index and influence market dynamics.
