When SpaceX hits the market, likely next month, Elon Musk’s fans will rush to buy shares no matter what the valuation.
A few months later, a far different group of investors might also scramble to get shares, and they’ll also buy at any price.
Index funds, the favorites of savvy, cost-conscious investors, might be forced to load up on SpaceX shares late this year if proposed rules make it easier for big stocks to join the indexes.
Last week, the index gurus at S&P Dow Jones Indices asked for public comment on a plan to loosen the criteria for giant companies to join the S&P 500.
While they don’t name names, they are clearly referring to likely initial public offerings of SpaceX, OpenAI and Anthropic.
They said current rules could exclude these companies and make the index less representative of the market.
The proposed changes could force everyday investors to effectively buy, through their index funds, speculative and highly valued stocks that could cause big losses.
The current rules are not that restrictive.
They require companies to be profitable.
They also demand that enough of a company’s stock be freely traded so forced buying from index funds won’t drive the share price to the moon.
Then there are rules related to seasoning, which sounds like it belongs in a recipe but means how long a company needs to be public before it can go in an index.
Nothing is certain right now.
The S&P index folks have only put their proposed changes out for public comment.
As proposed, the changes would apply to megacap companies, which S&P defines as the 100 largest companies by market capitalization.
https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20260430-1483123/1483123_spdji-us-indices-megacaps-consult-20260430.pdf">S&P asks eight questions of the general public.
Anyone can respond, and the deadline is May 28.
My answers to three of them are below.
Whatever changes S&P makes will take effect six trading days later, on June 8.
What’s the rush?
SpaceX is expected to go public that month, and Elon Musk has been pressing S&P and other index providers such as Nasdaq and MSCI to quickly include the company’s shares in their indexes.
Nasdaq has already caved to the pressure and made it easier for big companies to join its Nasdaq 100 index, which is tracked by the $444 billion QQQ exchange-traded fund and hundreds of billions of dollars that are benchmarked against the index.
SpaceX hasn’t announced which exchange its shares will list on, but I bet they will pick Nasdaq.
The S&P 500 is the fund that really matters.
It is tracked by roughly $20 trillion in both index funds and investments that are benchmarked against it.
As I wrote a few weeks ago, that could drive $400 billion worth of buying in the stock over the next six months to a year.
That might help SpaceX meet its hoped-for $1.5 trillion valuation, and it would also allow many of its longtime supporters to cash out at fat profits.
For everyday investors, the addition of SpaceX and the other IPOs could significantly raise their already high exposure to companies deeply involved in AI. How high?
It depends on how you count, but it is easy to get to just under 50% by including all tech stocks plus names like Amazon, Tesla and Meta Platforms, which are categorized as communications services or consumer discretionary stocks but are heavily exposed to AI. Adding them gets you to 49%, and that doesn’t include power companies and utilities that are getting boosts from AI.
S&P wouldn’t answer questions about the changes.
It said in a statement that the firm wants to ensure its indices “best reflect the markets they measure and serve.”
S&P says it wants to get feedback on its proposals.
Here are my answers to its three most relevant questions (edited for clarity):
Do you agree with the proposal to shorten the IPO seasoning requirement to six months from 12 months?
No.
What’s the rush?
S&P touts the index’s 65-year history and highlights companies such as Berkshire Hathaway and Amazon in promotional materials.
What difference does six months make?
It does make a difference to investors who bought companies before they went public.
Six months is typically when share lockups end, meaning index funds would be forced buyers of shares from early company investors, no matter what the price.
Do you agree with the proposal to exempt megacap companies from the current requirement that a minimum percentage of their shares be publicly traded?
No.
If you’re interested in S&P’s formula for this, https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20260430-1483123/1483123_spdji-us-indices-megacaps-consult-20260430.pdf">take a look.
The problem with dropping the minimum requirement is that index funds are huge and they are forced buyers of companies that join.
If too few shares trade, then all that buying will artificially drive up the share price.
That will benefit company insiders who are selling and hurt index fund buyers.
When more shares hit the market, there’s a good chance the price will fall.
Do you agree with the proposal that a megacap need not pass the financial viability criteria to be eligible?
No.
This one is easy.
The rule says companies must be profitable in the most recent quarter and the sum of the last four quarters.
It is borderline irresponsible for S&P to say profits shouldn’t be a requirement for inclusion in an index.
That would mean welcoming in the most speculative stocks in the market.
And the idea that giant stocks should be exempt from the rule makes them even more likely to be meme stocks.
We’ve seen the risks of stocks like these entering indexes during previous booms.
In 1999, Yahoo was added to the S&P 500 right at the peak of the dot-com bubble.
In this case, Yahoo had been public for three years and was profitable.
Still, the stock topped a $100 billion valuation, and it held the same roughly 4.5% weighting in the index as Microsoft does today.
By 2001, the stock was down 90%.
Yahoo was eventually acquired and its shares delisted in 2017.