[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?