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The S&P 500 Giveth and Taketh Away By Spencer Jakab

Stocks closed higher yesterday after Kevin Hassett, director of the National Economic Council, raised expectations for an easing of trade tensions with China . Today, stock futures are flat as talks continue in London. Meanwhile, Apple's developers' conference is turning into a dud .

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Stocks are priced according to the value of their future cash flows and the collective wisdom of millions of investors. And if you believe that, I have a bridge to sell you.

For the latest example of wacky price activity , look at the shares of Robinhood Markets and AppLovin. Both fell by as much as 8.4% yesterday on no corporate news. The common thread was that traders expected them to get added to the world's most followed stock index, the S&P 500, at this month's quarterly rebalancing.

It didn't happen. Robinhood and AppLovin shares had rallied by more than 50% in the previous six weeks, mostly in anticipation of an announcement Friday afternoon that they were getting added to the benchmark.

Their loss was other investors' gain-for now, at least. Enphase Energy was the top performer in the index Monday, and shares of Caesars Entertainment and Mohawk Industries also rose. The three had the lowest index weightings and were vulnerable to being replaced.

Stocks removed from the index to make room for new ones face further selling pressure between the announcement and the actual change to the benchmark.

Investors in stocks that actually get relegated might make that back eventually . Those owning an S&P 500 index fund don't: They reap only the loss, not the rebound. The three stocks already had trailed the S&P 500 by between 14% and 30% in the preceding six weeks.

The minimum value to enter the S&P 500 is around $20 billion, but there are criteria beyond size. With AppLovin worth $141 billion on Friday, the effect of adding it to portfolios would have been hefty.

Palantir, worth $83 billion last September when it got the nod, certainly made a splash and is the index's 25th largest constituent today. It had rallied by 75% year-to-date, partially in anticipation of being added. Then its shares jumped another 23% on huge turnover before the actual date of inclusion.

The largest rebalancing ever was Tesla. It already was one of the world's most valuable companies, but wasn't profitable. During the tech bubble, so many companies qualified on the basis of size that, to protect investors, the committee required companies to have some history of net income.

When Tesla finally ticked that box, the opportunity given up by index fund investors was substantial. Its stock jumped by almost 800% in the year before it got included. In the six months after it was added, though, it lagged the stock it replaced by nearly 80 percentage points .

Passive investors don't perceive any of this turnover as a cost because they faithfully track the index. Unfortunately, the gamesmanship is an invisible drag on the performance of the index itself.

Markets aren't as efficient as you might think.

Stocks I'm Watching

Tesla : Shares of the electric-vehicle maker were on track to continue their rebound from the rout last week that was sparked by Elon Musk's fallout with President Trump. Shares rose 2% premarket.

Taiwan Semiconductor : The world's largest contract chip maker reported a 40% rise in revenue in May compared to a year earlier. Shares climbed 4% in Taipei.

J.M. Smucker and GameStop are expected to report results on Tuesday.

MP Materials : U.S. negotiators are expected to press for a relaxation of China's rare-earth metal export curbs in trade talks between the two nations. Shares in the biggest U.S. rare-earth miner climbed premarket, after an 8% rally on Monday.

Casey's General Stores : The convenience-store chain's latest results topped expectations, sending shares higher in off-hours trading.

Cracker Barrel : The restaurant chain's shares fell off-hours after it unveiled plans to sell $275 million in convertible notes.

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One Big Chart

Apple Fails to Clear a Low Bar on AI

The company's hardware-first business model is putting it at a disadvantage in the AI age. Apple faced low expectations coming into its Worldwide Developers Conference this year and failed to clear them.

What I'm Reading The tech industry is fighting to save clean energy tax credits in the "Big, Beautiful Bill." AI companies have been leading backers of technologies including solar projects and battery storage. ( WSJ ) The best investors in the U.S. may be in Washington, not New York. Lawmakers and their families traded stocks heavily as Trump rolled out "Liberation Day" tariffs. ( WSJ ) Broadcom is making a lot of money by helping tech companies manufacture custom chips that speed up artificial-intelligence computations. Investors seem to be giving it too much credit for that, writes Heard on the Street. ( WSJ ) Global markets will face a major inflation test this week as a series of readings on U.S. price pressures, and two important Treasury bond auctions, run headlong into the rally for stocks around the world. ( Barron's ) The U.S. bond market spiraling out of control is closer to reality than many investors appreciate. What began as a relatively easy-to-digest increase in U.S. debt-to-GDP very quickly gets scary. ( Klement on Investing ) This Day in Markets History

On this day in 1997, the Dow Jones Industrial Average closed above 7500 for the first time. The Wall Street Journal noted that the market's climb "seems to inspire equal parts awe and dread among many investors." Fred Taylor, chief investment officer at U.S. Trust, guessed that the stock market would end the year "lower than its current level." (The Dow finished 1997 at 7908.25, or more than 5% higher).

Beyond the Newsroom

Buy Side from WSJ: This month, savers can still find CDs with maturities from six months to five years offering 4.00% APY or higher.

About Me

My name is Spencer Jakab and I've been musing about money and markets for more than 30 years, including editing The Wall Street Journal's Heard on the Street column for a decade, writing two investing books and running a team of stock analysts at a global investment bank.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

June 10, 2025 06:52 ET (10:52 GMT)

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