Andrew Bary

S&P Dow Jones Indices surprised investors more by what it didn't do than by what it did when it adjusted the weightings of the companies in the S&P 500 early this month. It was the first quarterly rebalancing since 2022 that didn't bring a change to the list of component stocks.

That has investors looking ahead to see what companies could be added over the rest of the year. The biggest companies by market capitalization tend to be added eventually, though the process is opaque and S&P Dow Jones Indices often adds companies that aren't the biggest ones by market cap.

That gives an edge, though no certainty, to AppLovin, Robinhood Markets, Carvana, Ares Management, and Cheniere Energy, the five largest eligible companies that aren't in the index, in order of market value. Another possible addition is Interactive Brokers, the largest company in the S&P 400 Midcap index.

The two financial stocks -- Robinhood and alternative investment manager Ares -- could get strong consideration because the S&P 500 is light in financials relative to the percentage of financial stocks in the broad market, according to KBW analyst Shreyank Gandhi.

That is a factor used by the index committee to determine which stocks that qualify -- the market-cap requirement is $20.5 billion -- actually get into the S&P 500. AppLovin could make it in as well because technology also is underweighted in the S&P 500.

There is no schedule for S&P 500 additions, but the index committee at S&P Dow Jones Indices will move when a component disappears to due a merger, a factor that points to changes in the current year.

Companies are eager to get into the S&P 500 for prestige and because membership has a positive effect on stock prices. Indexers, and many active managers, buy the stocks in the index. The effect can be immediate, with a stock rallying on news of an addition.

Investors bid up the price of AppLovin and Robinhood before the S&P 500 rebalancing action on June 6, a Friday, as they anticipated potential additions. Both stocks fell on the following Monday, with AppLovin down 8%, after no changes were made to the index.

Gandhi estimates there would be buying of 113.5 million shares of Robinhood and 31.3 million shares of Ares if they were added to the S&P 500. That represents 20 days worth of trading volume for Ares, which is less actively traded, and three for Robinhood. Gandhi sees a "mid to high" likelihood that Ares and Robinhood are added to the S&P 500 index during the rest of 2025.

So far this year, there have been five additions to the index, compared with 16 for all of 2024. The five are DoorDash, Williams Sonoma, Coinbase Global, Expand Energy, and TKO Holdings.

KBW's Gandhi wrote in a recent note that the second half of 2025 is likely to be more active than the first. Seven merger deals involving companies in the S&P 500 are due to close by year end, including acquisitions of Paramount Global and Interpublic Group.

He said that historically, S&P Dow Jones often has moved up companies from the S&P 400 Midcap index when mergers happen, but noted that there are only two eligible companies in the midcap index based on market capitalization: Interactive Brokers and Emcor. That raises the odds of a company that isn't in the midcap index being added to the S&P 500, Gandhi says.

One big company that likely won't be added to the S&P 500 is MicroStrategy, the big Bitcoin holder, because it apparently doesn't meet the index's profitability test. The company is valued at over $100 billion.

Companies need to be profitable under generally accepted accounting principles on a cumulative basis in the most recent four quarters, as well as in the most recent quarter, to be eligible. MicroStrategy lost money in the first quarter, which rules it out.

Even if it were profitable, MicroStrategy might not make the cut because the index committee may view the company as more of a closed-end fund than an operating business. MicroStrategy operates a small software business, but its Bitcoin holdings account for more than 95% of the value in the company. Closed-end funds aren't eligible for inclusion in the S&P 500.

The five smallest companies in the S&P 500 are Enphase, Caesars Entertainment, Mohawk Industries, APA and Invesco. They are valued at $7 billion or less, well below the $20.5 billion required for new additions.

When large companies come into the index, some companies need to come out. The smallest ones often are most vulnerable, based on S&P's actions in recent years. The four companies deleted from the index this year all had market values of $7 billion or less.

Write to Andrew Bary at andrew.bary@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

June 30, 2025 13:26 ET (17:26 GMT)

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