[tristanj]

On a fundamental level, the S&P 500 index is meant to be a benchmark of the market. Journalists, policymakers, investment managers, politicians, regular investors, everyone I know all use the S&P 500 as the benchmark of the US stock market.

If a significant percentage of the market is excluded from the index because they don't meet index inclusion criteria, then then index stops being a useful benchmark.

[usef-]

S&P500 is not a total market index. It tracks a specific kind of large firm, with certain filters.

Fast tracking means that the market likely wont have enough time to find the settled price (especially with the knowledge that passive funds are about to buy), and including a mispriced thing does not necessarily make the benchmark more accurate.

[tristanj]

Those filters for S&P 500 inclusion criteria have changed many times. They are not sacred nor set in stone. The question is, do those filters, which were designed for GAAP profitable traditional companies & discriminate against fast growing cash-flow-reinvesting startups that prioritize growth over profit, unnecessarily exclude major players in the U.S. stock market? The S&P inclusion criteria reward companies that prioritize profit over growth.

SpaceX, Anthropic, and OpenAI are all giga-caps preparing to IPO, and none of them will be eligible for S&P inclusion because of the 12-month profitability requirement. At current valuations, all are part of the top 20 largest companies in the US. These companies may be excluded from the S&P500 for potentially years, until they reach 12 months of profitability.

And you are vastly overstating the effect of S&P500 fast track inclusion, the plan was to reduce it from 12 months to 6 months; which is more than enough time for the market to find a price.

[jurgenburgen]

> Under current rules, these fast-growing companies would be excluded from the S&P500 for potentially years, until they reach 12 months of profitability.

> And you are vastly overstating the effect of S&P500 fast tracking, the plan was to reduce it from 12 months to 6 months; which is more than enough time for the market to find a price.

They might never reach 6 months of profitability, let alone 12 months.

[ywvcbk]

> which is more than enough time for the market to find a price

The price markets find would still inevitably be influence by the knowledge that the demand would increase massively in a few months.

> inclusion criteria reward companies that prioritize profit over growth

Or stable and sustainable growth. Whatever else SpaceX, OpenAI, Anthropic valuations are price in extremely optimistic growth. But yeah, I do see a point that including adequately priced growth stocks could be a net benefit but of course accouting for the actual valuation would turn index funds into managed ones.

Thankfully its not an issue at all since there is Nasdaq 100.

[SecretDreams]

Thank absolute Christ none of the companies you just listed will enter SP500 by default. The Risk/Reward is not functionally there to fast track companies and all of the examples you listed are too big to keep coasting on venture capital. Let them be public for 6+ months and let's see where they are at in the eyes of the public markers and then their inclusion can be re-evaluated.

What's the downside for the average pension holder with a 30 year horizon if they miss 6 months of Elon's newest scheme?

[usef-]

My mistake: it was Nasdaq that is being reduced to days, not S&P. Thanks.

[majormajor]

> If a significant percentage of the market is excluded from the index because they don't meet index inclusion criteria, then then index stops being a useful benchmark.

So what's the reason for fast entry specifically? If it's a significant portion of the market and will remain so, it doesn't need an accelerated entry. A benchmark should be conservative about new entrants so that it doesn't turn from a market benchmark to a trend/fad benchmark.

If time validates the valuations the entry will come in time, just like for previous entries.

[stonogo]

> So what's the reason for fast entry specifically?

Inclusion in as many indexes as possible is basically the definition of "too big to fail." It's the ultimate de-risk to know that if you fuck up badly enough the government will just give you everyone's money.

[alfiedotwtf]

Has anyone made sure Elon wasn’t born on Jekyll Island

[tristanj]

Because the index needs accuracy. If a company is 1-2% of the total US market cap and not included in the index, then the index is wrong right now. The longer this company is not in the index, the longer this error compounds.

In the coming few months, multiple giga-cap companies (SpaceX, OpenAI, Anthropic) are all planning to IPO. These companies will likely never meet S&P profitability inclusion criteria for the next 5 years. These are not bad companies, but because the S&P inclusion criteria were written for old GAAP profitable companies, and not high-growth companies that invest their cashflow into company growth over profits. Excluding some of the most civilization changing companies from the benchmark means the benchmark is doing a terrible job.

[tankenmate]

"Because the index needs accuracy.", and I would argue that include price accuracy not just inclusion accuracy. The S&P is a benchmark that is designed to reflect a subset of the market, and giving only some companies early access to the benchmark changes the benchmark. So if you want a benchmark that's designed to include all the big stocks regardless of age, profitability, etc then go make a new benchmark. The only thing you need to do is convince others to use your benchmark.

[tristanj]

"go make a new benchmark" completely ignores how this works in practice. Benchmarks are only useful because everyone uses the same one, you can't swap it out. The S&P 500 benchmark is used as a comparison for trillions of dollars of mutual funds, index funds, and institutional mandates. The further the S&P 500 strays from reflecting the actual market, the more useless it becomes.

Also the S&P criteria have been revised multiple times, it's not some sacred unchangeable document.

[dlenski]

> The further the S&P 500 strays from reflecting the actual market, the more useless it becomes.

Here I once again agree with you in part, and disagree in part.

The S&P 500 should reflect the actual market. That is, the actual market of publicly-traded companies with legal requirements for transparent accounting and reasonable expectations of future positive cash flows.

As you wrote yourself (https://news.ycombinator.com/item?id=48408363), "These [mega-cap IPO] companies will likely never meet S&P profitability inclusion criteria for the next 5 years."

At this point in time, I don't think it's reasonable to expect future positive cash flows from SpaceX or Anthropic. There are indeed some reasons to suspect that there won't be future positive cash flows from them.

[ywvcbk]

You want to turn S&P 500 to a total market index. Why? That was never its purpose.

[tristanj]

No? Where did I say that?

The purpose of the S&P 500 is to be the "best single gauge of U.S. large-cap equities". That's direct from their website. I never dispute this.

I dispute the fact they claim to be the best benchmark of large-cap U.S. equities, yet have rules that (currently) exclude large-cap equities like SpaceX, OpenAI, or Anthropic.

[mandevil]

There are indexes which explicitly try to capture the entire market- the Russell 3000 is most prominent, but the Wiltshire 5000 is another one, and Vanguard's Total Market Funds and ETF follow the CRSP US Total Market Index. I believe all of them plan to include SpaceX/OpenAI etc. within a few weeks of its listing, which is what I'd expect from their goal of tracking the total market. Other indexes follow just a few stocks- most famously, the Dow Jones Industrial Average (built during an era of when it had to be calculated by hand every night) looks at just 30 stocks in a weird way(1).

The S&P 500 isn't either of those. It has a list of criteria for inclusion, one of which is profitability. They are sticking with that criteria. If you don't like it, sell your VOO and buy VTI instead.

1: It is essentially impossible to build an index that tracks the DJIA because, since it was done on pencil and paper, it isn't actually market-cap weighted, but is share price weighted, with a correction factor for each stock to account for splits, one stock replacing another, etc. Because of that nature, the weights of the DJIA change minute by minute, so someone attempting to track it would be subject to enormous error.

[ywvcbk]

> Because the index needs accuracy

So you are saying that S&P 500 should be merged with Russell 2000 or rather just become a fully market index to be more "accurate". You do know that's something that exists already, having different indexes makes perfect sense and consumers can pick the ones they want based on their risk profile and preferences.

> most civilization changing companies from the benchmark

It took Google 2 years to get into S&P 500. For Microslop it was 8 years (!). So what's new?

[tristanj]

I am saying none of those things. S&P claims their S&P500 index is the "best single gauge of U.S. large-cap equities". That's taken directly from their website.

I dispute this claim, because the (current) rules for S&P500 inclusion exclude companies like SpaceX, Anthropic, and OpenAI. All of these companies are planning to IPO this year, and even if these companies maintain their present valuation for a year, none are eligible for S&P 500. Due to profitability requirements.

Yet these are all U.S. large-cap companies, among the top 20 largest in the U.S., and by S&P's description of the index, should be included. Not including these companies makes the index inaccurate.

> [Google and Microsoft took years go get into the index], so what's new?

Because SpaceX, Anthropic, and OpenAI are $1T+ companies. Google and Microsoft were much smaller relative to the size of the index when they joined.

[SpicyLemonZest]

Best single gauge, not summary. Systematically excluding companies that are large and buzzy yet not profitable is a matter of intentional design to improve the accuracy of the gauge, even if previous companies were not quite this large. Anthropic and OpenAI are great illustrations of why you might want such a design: the bull case for each is that they're going to dunk the other and become the US's primary provider of AI inference, and neither is yet profitable, so by including both of them in the index you're "double counting" investor expectations of how valuable a company producing profitable AI inference will be.

[qnpnpmqppnp]

> If a company is 1-2% of the total US market cap and not included in the index, then the index is wrong right now.

To be clear, S&P 500 relies on float, not total US Market Cap, and Space X will have a tiny float.

Even if it was included, SpaceX would not account for 1-2% of the S&P 500 (more like 0.1%), so even if we reason on the basis of a benchmark, it's not a meaningful difference.

[tristanj]

https://news.ycombinator.com/item?id=48407542

[qnpnpmqppnp]

Thanks, but should I conclude you agree with my point?

[ambicapter]

Even if he did, it seems he would keep arguing regardless.

[tristanj]

No, because after lockups expire in 6 months, SpaceX float would increase to 40-50% and it's float-adjusted weight would be >1% of S&P. This is assuming share prices remain unchanged, when they could go either way.

SpaceX at its current valuation places it as one of the 5 largest companies by market cap in the US.

[jddj]

Maybe you know this already, but this reads like exactly the kind of reasoning that people looking back at irrational market euphorias point to as a sign things were about to go awry.

[tristanj]

The purpose of a benchmark is to reflect the market. If the US economy is pumping out high-growth but overpriced & unprofitable companies via IPOs, at unreasonable valuations, the benchmark should reflect that.

It's not S&P's fault this is happening.

[jddj]

On the contrary. There are many benchmarks, some small subset of which are intended to reflect the whole market.

There are indices for every little thematic and niche corner or strategy or idea, there are broad-as-possible indices, and there are indices with requirements like listed age and profitability.

[tristanj]

I'm not debating any of that. This discussion is about the S&P500 as a benchmark, which has an expressly stated purpose of tracking large-cap US equities.

This discussion is about if S&P500 actually achieves this benchmark, when it has (antiquated) rules that exclude large-cap US companies of the likes of SpaceX, Anthropic, and OpenAI.

[phlakaton]

> Because the index needs accuracy.

No, it doesn't. At least, not the way you are probably defining it.

This sounds to me like you may be trying to use the index for something it's not really meant to be used for.

[tristanj]

What is the S&P 500 meant for then? It was created in 1957 as a benchmark of US equity performance. That's S&P Global's own stated purpose. If it's systematically excluding companies that represent significant chunks of total US market cap, the index isn't doing its job.

[Applejinx]

Investment funds are for making money. Nobody cares about 'accurately reflecting the state of the market' if that's objectionably high-risk. You invest in an investment fund to make money.

There is no way you can commit to holding big quantities of these methane bubble swamp gas companies and claim it isn't high risk. You'd have to be certain you could bail at the right moment, and that doing so would not obliterate the market through your giant market move… or commit to being a giant bubble of fraud that can never possibly blow up, forever.

These are not responsible ways to make vast sums of money, not because they're unethical but because they're gambles at very high stakes.

[tristanj]

You are confused what the S&P 500 actually is. It is a benchmark, not a managed fund. Investment funds that track the S&P 500 do not have a say on which stocks to buy. They copy what the index allocates. Whether these companies allocated are risky or not, has no relevance to if the benchmark accurately represents the US equity market. If three of the top 10 largest companies in the U.S. are excluded from the index, which may be the situation this year, then the benchmark is wrong. The benchmark is failing to achieve its stated function.

Your risk argument applies to actively managed funds, not to an index whose entire purpose is to represent the U.S. large-cap market.

[ozozozd]

But it is not 1-2% of the total US market cap, is it?

It aspires to be that way. The market decides, and it hasn’t decided yet.

Am I missing something?

[SecretDreams]

> These companies will likely never meet S&P profitability inclusion criteria for the next 5 years.

They won't stay gigacaps for 5 years if they don't become profitable. At their size, they can't just keep burning money at that scale under the public's eyes. The funding will divert from VC to shareholder equity and that will quickly see they don't stay gigacaps.

So this is a self correcting problem. Either they'll start making money and hit profitability targets or their market cap will diminish.

[thesmtsolver2]

> If a company is 1-2% of the total US market cap

Over what time horizon should that number be computed? Every day? Every second? Every month/quarter?

It is not as simple as it seems.

[Applejinx]

If they're doomed, they're bad companies. This isn't complicated. You can run a fraud and double down real aggressively and as long as you're not called on your bullshit you look incredibly good, until you don't.

If they're doomed, they're bad companies. You can make the argument they're not doomed, but that's a separate argument.

[dlenski]

I'm with you on this part:

> Because the index needs accuracy. If a company is 1-2% of the total US market cap and not included in the index, then the index is wrong right now. The longer this company is not in the index, the longer this error compounds. In the coming few months, multiple giga-cap companies (SpaceX, OpenAI, Anthropic) are all planning to IPO.

I'm nodding vigorously on this part:

> These companies will likely never meet S&P profitability inclusion criteria for the next 5 years.

But here, you lose me…

> These are not bad companies, but because the S&P inclusion criteria were written for old GAAP profitable companies, and not high-growth companies that invest their cashflow into company growth over profits. Excluding some of the most civilization changing companies from the benchmark means the benchmark is doing a terrible job.

The point of investing in a total(ish) index of the public stock market is to invest in companies that have a reasonable expectation of net-positive future cash flows, justified in part by legally-mandated transparent reporting of their finances.

You can't just buy every publicly-traded stock though: for one thing, that would massively incentivize obvious scammers to do the bare minimum to get their stocks included, and drag the index down. Avoiding companies that are illiquid, non-transparent, or lacking in a clear track record is important. The SpaceX IPO bears more than a passing resemblance to a pump-and-dump scheme:

1. SpaceX's line of business* is tremendously unclear.

2. SpaceX doesn't actually need external capital to fund its operations.

3. SpaceX is floating only a tiny fraction of its putative market capitalization.

4. The main purpose of the IPO appears to be to allow insiders to cash out.

5. The way the lion's share of the IPO gets sold is if large index funds and pension-holding companies demand shares, and that only happens with the index-inclusion exceptions we're discussing here.

So, we agree that these "mega cap IPO" companies won't be profitable in the next 5 years. That's a huge period of time. How can public markets accurately value a company that isn't expected to be profitable for such a long period of time; there are so many things that could change their trajectory towards profitability, all the more so if we accept your premise that these companies are "civilization changing."

My conclusion is that it's perfectly fine, even beneficial, for indices like S&P 500 to avoid any special treatment for these companies. If SpaceX is clearly profitable 5 years from now, and has reached 50% free-float, that seems like a good time to start including it in the index.

---

* Nearly all of its revenue comes from launching satellites and running a satellite-based communications network, but much of its putative valuation comes from a hastily glommed-in also-ran AI company, and its association with a person who is famous for running other businesses and for political connections.

[lovich]

It’s a benchmark of the market under certain rules, like having multiple quarters of earnings for the market to value them at.

These companies want special exceptions. If you are an exception why should you be included in a benchmark? At best they should have an asterisk against their name like Sammy Sosa or Mark McGuire if they are not following the same rules.

[tristanj]

Your baseball cheating analogy makes no sense here. Rules against corked bats / steroids exist so people don't cheat at a sport and all players can compete equally. S&P rules are supposed to make the index reflect the market. Totally different.

The profitability requirement is something made up by the S&P committee. If that rule ends up excluding trillions in market cap, the rule has defeated its own purpose. The 12 months of profitability requirement punishes high-growth companies that invest their FCF into growing the business vs taking profits.

It excludes companies like Amazon, which when ran by Bezos, was famously unprofitable and invested all free cash flow into growing the business and never turned a significant profit until >20 years after its founding.

[lovich]

> Rules against corked bats / steroids exist so people don't cheat at a sport and all players can compete equally.

> The profitability requirement is something made up by the S&P committee.

Those are both equally made up. In this case the rules are being changed for new entrants into the market such as SpaceX for the Nasdaq and other benchmarks that are allowing it for that none of the previous companies in said index were allowed to get in under.

And since it’s 15 days and I know most companies have lockout terms on the order of months for various levels of stock, I’m hesitant to believe this won’t modify the benchmarks beyond what has happened with previous inclusions.

`JumpCrisscross’s reply to one of my other comments on this thread in regards to the S&P being a committee based decision actually has had me pause to think, but your argument that the rules are arbitrary so it can’t be cheating like my baseball analogy fails to land.

[tristanj]

Baseball rules exist to prevent cheating. The S&P rules exist so the index can accurately reflect the market. When S&P rules end up excluding a significant part of the market with trillions in real market cap, that means the rules are badly designed and broken by its own standard. You're trying to compare updating badly written S&P 500 rules to cheating, which makes no sense at all. They are completely different.

And calling out how the rules are being changed for new entrants into the market such as SpaceX on Nasdaq proves my point. Index providers are already quietly admitting their criteria are too rigid.

Even S&P adjusted their rules to allow SpaceX into the index, although only for the total market index.

https://press.spglobal.com/2026-06-04-S-P-Dow-Jones-Indices-...

[tankenmate]

"The S&P rules exist so the index can accurately reflect the market", the rules exist to reflect a subset of the market, and the committee chooses that subset. It's their subset so they get to set the rules, you don't have to use it if you don't want to. If you don't like that subset then create your own index. Then you just need to convince others to use it.

[tristanj]

Per the S&P 500 website, the claimed subset of the market is "U.S. large-cap equities". S&P claims their index is "best single gauge of U.S. large-cap equities". But, it's clear that given the current iteration of the rules, none of the major upcoming IPOs of Spacex, Anthropic, or OpenAI are eligible for S&P500 inclusion, and they likely will not be for years.

Claiming to have the "best single gauge of U.S. large-cap equities", yet having rules that exclude three of the top 20 largest U.S large-cap equities which make up ~5% of the total market cap of the U.S. stock market, means your benchmark is inaccurate by my book.

[lovich]

> Baseball rules exist to prevent cheating.

> The S&P rules exist so the index can accurately reflect the market.

I personally believe that accurately reflecting a market involves not allowing cheating. I personally believe that getting to change the rules so that your IPO gets included before the general market can discern your value because of your connections to the benchmarks is cheating.

If you want to disagree with me on these points then please do so, but understand why I am claiming that this behavior is cheating.

[tristanj]

> getting to change the rules so that your IPO gets included before the general market can discern your value because of your connections to the benchmarks is cheating.

I disagree with you because you are vastly exaggerating the scope and effects of the proposed rule change. S&P was going to decrease their minimum index inclusion time from 12 months to 6 months. 6 months is far more than enough time for the market to decide a fair price of an equity. The rule change never ended up happening, hence this post.

There is zero "cheating", I don't understand why you keep harping on that.

[ywvcbk]

> accurately reflect the market. When S&P rules end up excluding a significant part of the market with trillions

Define what that means? The weights are based on the value of shares available publicly, not market cap. So even if included SpaceX wouldn't even be in the top 20 and have a lower weight than Johson & Johson.

A lot of what people are saying here seems to be based on a misconception of what S&P 500 is supposed to be. Maybe it became the most popular index because of those rigid rules?

[lelanthran]

> S&P rules are supposed to make the index reflect the market.

Where did you find that? Link?

I ask because common understanding is that the index is a stable tracker of the market, specifically to exclude volatility.

IOW, it reflects a smoothed market, not a point-in-time-with-daily-granularity market. I would really like to know where you read what you read.

[tristanj]

The S&P 500 brochure describes itself as "the best single gauge of large-cap U.S. equities". That language implies they act as a benchmark, which I find questionable, given that based on their current eligibility requirements, it would exclude all three of SpaceX, Anthropic, and OpenAI.

All three companies are in the top 10 largest companies in the US by market cap, based on their current valuations. If these companies maintain their valuations over the next year, they'd still be ineligible under current rules. Because none of them are GAAP, they're all heavily reinvesting cash-flow into growth. These companies may be excluded from the S&P500 for potentially years, until they reach 12 months of profitability.

A benchmark of the U.S. stock market that excludes multiple of the 10 largest U.S. companies cannot be taken seriously.

https://www.spglobal.com/spdji/en/brochure/article/sp-500-br...

[lovich]

It currently would exclude all 3 companies because they aren’t publicly traded.

Post IPO they wouldn’t immediately be included. Every benchmark I am aware of doesn’t immediately include companies because there is a decent amount of volatility shortly after, especially due to all the internal stockholders who have restrictions on how quickly they can sell their stock and routinely dump their stock en masse the second those restrictions are lifted.

All the hubbub about benchmarks like Nasdaq right now is because they are altering their rules for these companies in particular and including them much earlier and before what are standard restrictions for employees to sell their stock.

The fear is that massive pension funds whose rules have them rebalance into these benchmarks will be buying up these stocks before that dump and the public’s retirement funds will be made into bagholders.

> Because none of them are GAAP, they're all heavily reinvesting cash-flow into growth. > A benchmark of the U.S. stock market that excludes multiple of the 10 largest U.S. companies cannot be taken seriously.

Ok, now I know not to take you seriously if you can recognize companies aren’t following GAAP but think it’s wrong to not treat them the same. I don’t even know if it’s true that they aren’t following GAAP, but everytime a company tries to argue why they aren’t following GAAP but instead their own magic formula that shows how successful they are, we get another Enron or Theranos.

[lelanthran]

> The S&P 500 brochure describes itself as "the best single gauge of large-cap U.S. equities". That language implies they act as a benchmark,

Okay, but isn't that gauge measured over a specific timeframe? Since investors in this index have timeframes in years/decades not days, why would you expect the index to have a ranularity of days?

> That language implies they act as a benchmark, which I find questionable, given that based on their current eligibility requirements, it would exclude all three of SpaceX, Anthropic, and OpenAI.

Sure, but it excludes lots of companies. This specific index is risk-averse and caters to risk-averse investors; regardless of whether the company is SpaceX, Anthropic or OpenAI, rick-averse investors are going to shy away from any share that hasn't been traded long enough for price-discovery to kick in.

[ywvcbk]

S&P 500 weights are based the value of shares available on the public market not the market cap. Based on that SpaceX will be nowhere near the top 10.

Do you think their valuations wouldn't fall dramatically if they were willing to float a significant proportion of their shares on the market anytime soon.

[tristanj]

I addressed that exact point here https://news.ycombinator.com/item?id=48407542

Based on previous IPOs, SpaceX will grow to ~40% float by 12 months, thus if it keeps its current valuation unchanged, will remain near the top 10 spot.

[rileymat2]

What is it a benchmark for? All investable public stocks or the economy writ large?

[ywvcbk]

Neither? What makes you think it was supposed to be a benchmark for either.

Amongst other thing weights are based on the value of shares that are traded publicly, not market cap.

[onion2k]

If a significant percentage of the market is excluded from the index because they don't meet index inclusion criteria, then then index stops being a useful benchmark.

If you change a benchmark whenever you think it'll be 'wrong', then it becomes a measure of the heuristics you use to predict what'll impact the benchmark rather than a benchmark in its own right.

[tristanj]

S&P claims their S&P 500 product is the "best single gauge of U.S. large-cap equities". For this benchmark to be accurate, at a fundamental level, this benchmark has to follow the market and reflect current market conditions.

The market decides what the large-cap U.S. equities are, not S&P. If S&P excludes some of the largest U.S. companies, which based on their current rules, will exclude all of Anthropic, SpaceX, and OpenAI; then they do a poor job reflecting the benchmark they claim to follow.

It's not S&P's fault that market conditions have changed.

[onion2k]

this benchmark has to follow the market and reflect current market conditions

Sure, but right now they don't know how the market will react, so changing the index rules before there's any data would be a measure of their heuristics (e.g. what they believe the market will do), not a measure of what the market is actually doing.

[tristanj]

The core issue is that S&P requires companies to be profitable for 12-months to get included in the index. Yet all of SpaceX, OpenAI, and Anthropic are highly unprofitable, because they are prioritizing investing all free-cash-flow into growth instead of returning money to shareholders. These companies likely will not be profitable for years, and without a rule change it's unlikely they will be included in the index anytime soon.

Given these large-cap companies currently represent ~5% of the U.S. stock market capitalization, it's difficult to justify why these companies are excluded from a large-cap index.

[onion2k]

Given these large-cap companies currently represent ~5% of the U.S. stock market capitalization, it's difficult to justify why these companies are excluded from a large-cap index.

It's not outside the realms of possibility that the price of the shares post-launch could collapse if the market decides they're over-priced. Shares in companies have been known to settle on valuations far below the IPO price in the past. At that point they won't represent ~5% of the total. Changing the index rules immediately before finding out what's going to happen feels like putting the cart before the horse.

[tristanj]

Even assuming a post-IPO valuation drop by 50%, SpaceX would still be a top-25 US company by market cap.

Your "wait and see" argument doesn't apply, because (SpaceX, Anthropic, OpenAI) are excluded from the index for profitability reasons, not valuation reasons. These companies are deliberately reinvesting free-cash-flow into growth rather than booking GAAP profits. That's not going to change 6 months after IPO, and likely not for 3-5 years.

At the current pace, three of the ten largest US companies will not be included in the S&P 500, for probably 5 years after IPO.

The question still remains: should a benchmark that claims to represent large-cap US equities exclude companies that are demonstrably large-cap, just because they allocate their capital towards growing the company instead of generating profits?

[matwood]

Matt Levine, who probably knows more about finance than anyone on this site, has said the same thing. He’s also talked about all the hate mail he gets. Large market etfs like VTI or VOO are supposed to track the market. It would be weird if they ignored trillion+ market cap companies. If the market decides to dump these companies then they’ll fall out of the index.

Index criteria have also changed many times over the years, and they are changing again to deal with later stage companies coming to the market with already huge valuations.

[baobabKoodaa]

Yes, Matt Levine said that, but he also argued the other side's point of view, as he regularly does.

[tristanj]

I completely agree. People have parroted the benefits of passive investing and blindly following the benchmark index for decades, yet the instant some overpriced turds (Anthropic, OpenAI, and SpaceX) are considered being adding to the benchmark, they backtrack and fight tooth and nail against including them.

All three companies are large enough by market cap ($1T+) to qualify for the S&P 500 benchmark, which claims to track the top 500 largest U.S. large-cap equities.

They have a point (not wanting to invest in overpriced equities), but if you don't like the companies that surface through passive investing then don't be a passive investor. It sounds like these people want active investing instead. If that's your position, just buy actively invested funds, not ruin the benchmark for everyone.

S&P is caught in a bind, because if they add these companies to the index, it would aggravate millions of passive investors.

[qnpnpmqppnp]

While there's some truth in your point, I think you're being unfair in framing this story as passive investors betraying their own philosophy because they suddenly realize this passivity would cause some "overpriced turds" to be included in their portfolio.

Passive investors did not "backtrack", on the contrary their preference on this matter is that index rules should remain unchanged. Conversely, it seems fully consistent for a passive investor to criticize Nasdaq-100 for actively amending their rules to achieve a specific result.

So I find it rather unfair to conclude that "these people want active investing instead". As far as I know, these people are reacting to "active" decisions (such as Nasdaq-100's) and cheering actual passivity (such as S&P500's decision).

Now, one can argue that there are good and legitimate arguments for the inclusion rules to evolve, but by definition amending the rules is an active decision.

[tristanj]

The reasoning here is backwards, because the rules in their current form exclude all three of the major upcoming IPOs of civilization changing companies (spacex, anthropic, openai). These companies are all large-caps, are currently in the top 20 largest companies in the US, but the S&P 500 index which claims to be a measure of the 500 largest companies in the US will systematically exclude these. Very likely for 3-5 years and more.

How can S&P justify excluding these three companies from an index of large-cap US companies, which when combined together, consist of 5% of the total market capitalization of entire stock market of the United States?

If the rules are not changed, then the S&P 500 will exclude a significant part of the US stock large-cap market, which defeats the entire purpose of it being a benchmark index.

If the S&P 500 was only used as a benchmark as it is originally intended, there will be no debate to adjust the rules to include these companies.

Yet because today there's trillions of dollars tied up to this benchmark, inclusion and exclusion becomes a financial issue.

S&P is under immense political pressure to not adjust their index because asset managers and the general populous don't actually want passive investing.

[qnpnpmqppnp]

You're changing the discussion.

I was specifically not discussing whether S&P would be right to change the rules. As I said, there can be good and legitimate reasons for such change; I'm not disputing it.

The point of your previous comment was a critic against individual passive investors, accused of backtracking and betraying their own credo. This is what I was reacting to.

[watwut]

Not wanting to change the rules just because these three companies really really want in before prices settle and before they are profitable is the correct behaviour.

The unjustifiable thing is changing rules for them.

[CuriouslyC]

I don't care about being forced to own SpaceX if it's in the index, I do care about it being forced into the index before it's had a chance to settle, so that private investors can dump on me.

[tristanj]

But that wasn't going to happen with the S&P 500, the proposal was to reduce inclusion time from 12 months to 6 months, and this did not pass. 6 months is more than enough time for price discovery to occur.

And even if it was added to the index immediately after IPO, index weighting in S&P is float weighted, SpaceX at IPO will have minimal float, and SpaceX would be ~0.125% of the index at IPO. Not much to matter.

[cman1444]

That ".125% is not much to matter" argument also cuts the other way, against the Matt Levine argument that the S&P is excluding trillion dollar companies and should adjust the rules for them.

Should S&P really adjust the rules for such a small portion of the index?

[tristanj]

Yes, because that number increases to 1-2% of the index after the IPO lockup period ends.

There are three IPOs coming this year that meet this criteria.

[matwood]

Market pricing will be interesting. People have been complaining about TLSA being over priced for years and now it's 2%+ of the S&P. Are people selling VOO and VTI because of the TSLA allocation? Nope, in fact TSLA has made them all a lot of money.

People were falling over themselves to invest in these AI companies and SpaceX not that long ago. 75B worth of SpaceX now has to get sold to IPO investors to hit the desired valuation. People say a lot (especially on the internet), but when the rubber meets the road we'll see what people do with their money.

The other bind the S&P is caught in is if these AI stocks IPO and then moonshot before they get added. The question will then be is the S&P an antiquated index? How do multiple trillion dollar companies in the market not end up in the S&P 500 sooner? No one thinks of that case because everyone is so sure they are all going to zero.

[MobiusHorizons]

It may be used as a benchmark, but that’s not actually the purpose of it. The purpose is to serve as a way for people to invest in a representative sample of the market. It can still be a representative sample with safeguards. If you want a benchmark without safeguards, you can calculate one without risking millions of people’s life savings.

[tristanj]

You have your history backwards. The S&P 500 was created in 1957 as a benchmark. The first investable index fund tracking it (Vanguard's) wasn't created created until 1976. Vanguard created their fund to track the benchmark, not the other way around.

And if you need a second, different index to function as the true market benchmark because the S&P 500 no longer reflects the actual market, then you just agreed the S&P 500 is no longer an adequate benchmark. You just agreed with my point.

[phlakaton]

Because it's selective, the S&P by definition does not reflect the actual market. It reflects a subset of it.

If you're comfortable with this notion of what the S&P does, then you ought to be comfortable with S&P applying the same methodology they've always used. There are other indexes you can reference if this particular sampling of the market isn't to your personal liking.

[tristanj]

The S&P's historical inclusion criteria were designed to filter out unstable, illiquid questionable companies to get a view of large-cap US equities. That logic worked when every major American company was public and profitable.

That's not true any more. Today we have multiple giga-caps (SpaceX, Anthropic, OpenAI) vying to IPO, all of which potentially in the top 20 largest companies in the US market, all ineligible for S&P 500 inclusion because of the 12-month profitability rule.

You claim S&P can "apply the same methodology they've always used" but this is just factually wrong. The inclusion criteria are not sacred rules set in stone and S&P has rewrote them multiple times. For example, they banned dual-class share structures in 2017 to stop SNAP from joining the index, but reversed it in 2023 because they excluded too many companies. The rules get rewritten when the market changes, and it's clear the current market environment has changed.

Meanwhile, Nasdaq changed their rules to handle this situation. And S&P changed the inclusion criteria for the S&P Total Market Index so SpaceX would be included.

It's clear these inclusion rules are changing.

[ywvcbk]

> out unstable, illiquid questionable

So Space X, OpenAI, Anthropic? Those are perfect examples.

It's unlikely their valuations could survive the IPO if their float wasn't extremely low.

> top 20 largest companies in the US market

You do know that S&P weights are based on the free float and not the market cap. So based on that SpaceX etc. will not be in the top 20. The total value of shares of Johnson & Johnson available on the public market will be much higher than that of SpaceX/etc. based on their current valuations.

[phlakaton]

Then your issue is not the S&P methodology, which despite changes in detail remains, as you've said, aimed at filtering out undesirable companies from the index. Your issue is that you want us to believe your favorite tech stocks, which are both wildly unprofitable and have P:S ratios that defy rational investment, are somehow desirable immediate additions to the index. And your argument for why this should be is a lofty claim that "the market environment has changed."

You believe in brand power over numbers. Which is your prerogative. But it's not how the S&P is managed.

[anonymars]

AKA, the ol' "this time is different"

[ywvcbk]

> the S&P 500 no longer reflects the actual market

Well it was never intended to reflect the full "actual market".

> no longer an adequate benchmark

According to your definition it never was. However there were and are plenty of other index benchmarks which serve different purpose. Its just that S&P 500 managed to become the most popular one, why did it happen if it was always inherently flawed?

Like they didn't even add Microslop for 8 years...

[MobiusHorizons]

Thanks I believe you are right.