S&P 500 Index (SPX)

What is the Methodology of S&P 500 Index (SPX)?

The Standard and Poor’s 500 Index, more commonly referred to as the “S&P 500,” is an index comprised of ~500 publicly traded U.S. companies.

The purpose of the S&P 500, just like all stock market indices – e.g. the Dow Jones Industrial Average, Nasdaq Composite – is to measure the performance of the broader stock market (and U.S. economy).

The S&P index is widely regarded as the best gauge of how large-cap U.S. equities are performing, which is why it’s often used in intrinsic valuations (e.g. DCF terminal value growth rate).

Learn More → S&P U.S. Indices Methodology

How is the S&P 500 Index Structured? (“Market Cap Weighting”)

The S&P 500’s value is calculated based on the market cap of each company, which is equal to the share price of the company multiplied by the total number of shares outstanding.

Note that the share count is adjusted to consider only the shares that are available to be traded in the open markets.

Since the market capitalization is adjusted for the shares available for trading, the S&P is considered a float-weighted index – i.e. it accounts for only the shares that can actually be traded in the market.

Each company in the S&P 500 index is weighted differently based on their respective market capitalization, which can be calculated by dividing the company’s market cap by the total market cap of the S&P 500.

Therefore, companies with larger market caps are weighted more heavily – meaning their positive/negative share price movements are much more impactful on the broader index.

What is the Criteria for Inclusion in the S&P Index 500?

To be eligible for inclusion in the S&P 500 index, the following criteria must be met:

• Minimum Market Capitalization of $8.2 Billion
• Structured as Corporation Based in the U.S. with Common Stock in Capitalization
• Listed on an Eligible U.S. Exchange (e.g. NYSE, NASDAQ)
• Positive Reported Earnings in the Most Recent Quarter and on a Trailing Twelve Months (TTM) basis – i.e. the Sum of the Most Recent Historical Four Quarters

Only the U.S.’s largest corporations with stable performance can be added to the S&P 500, and the list is reviewed and updated on a quarterly basis.

^{S&P 500 Eligibility Requirements (Source: S&P Global)}

What are the S&P 500 Companies?

Below are the top ten constituents of the S&P 500 based on index weight:

S&P 500 Stock Market Index: Sector Breakdown Chart

The information technology (IT) sector is the most significant contributor to the S&P 500 index.

The graph below shows the percentage contribution by sector:

^{S&P 500 Sector Break-Down (Source: S&P Fact Sheet)}

What is the S&P 500 Today?

Checking the daily performance of the S&P 500, assuming it is a trading day in which the markets are open, can be easily done from any of the following resources:

• Wall Street Journal (WSJ)
• Bloomberg
• CNBC
• MarketWatch
• Yahoo Finance

S&P 500 Year to Date (YTD) Performance in 2021

According to S&P Global, an estimated $13.5 trillion is indexed to the S&P 500 as of December 31, 2020.

The chart below reflects the year to date (YTD) performance of the S&P for 2021.

^{S&P 500 Year-to-Date Performance as of Dec. 16, 2021 (Source: S&P Global)}

What are the Limitation to S&P 500 Index?

Following the initial break-out of COVID-19 in 2020, the stock market recovered and performed far better than most expected.

There are several potential reasons for this reaction – e.g. the risk-free rate for equities (US 10-year treasury notes) was yielding around 0.6% to 0.8%, so many institutional investors still opted to invest in large-cap companies unlikely to default.

In particular, the strong performance of the “FAANG” stocks disproportionately exceeded the overall market as they led the S&P 500’s swift recovery.

• Facebook
• Amazon
• Apple
• Netflix
• Google

Considering their weighting in the S&P 500 Index, the market surpassed record all-time highs later in 2020 despite the economic turmoil and record unemployment.

The scenario stated above portrays the main drawback to the S&P 500 – which is that the strong performance of a select few companies can uphold the index. Not to mention, these companies are frequently criticized for being overvalued – e.g. Amazon, Apple, and Tesla.

It is argued that the index is too concentrated on leading high-market cap companies and prone to artificial inflation, as opposed to accurately representing the total market performance as intended.

What is the Difference Between the S&P 500 Index vs. Dow Jones?

The Dow Jones Industrial Average (DJIA), or the “Dow” for short, is another prevalent market index consisting of large, established companies.

There are several differences, most notably that the DJIA consists of only 30 companies that are deemed market leaders in their respective industries.

Furthermore, the DJIA is share price-weighted, as opposed to market cap-weighted like the S&P 500, which means companies with higher share prices hold greater weight.

For comparison to the S&P 500, the value of the DJIA index is calculated by:

• Step 1: Adding the Share Prices of all 30 Companies in the DJIA Index
• Step 2: Adjusting for the Weighting of Each Company (Price-Weighted Structure)
• Step 3: Dividing by the Dow Divisor (i.e. Adjustment Factor)

The S&P 500 and the Dow Jones Industrial Average (DJIA) are nevertheless two of the most commonly tracked indices of U.S. equities.