Damodaran Warns of Trillion-Dollar Battle Over SpaceX and OpenAI in S&P 500

The landscape of global passive investing is facing a seismic shift as trillion-dollar giants like SpaceX, OpenAI, and Anthropic prepare for public listings. NYU Stern Professor Aswath Damodaran warns that the struggle to integrate these massive, loss-making entities into the S&P 500 could fundamentally alter the index's risk and growth profile.

The Conflict Between Growth and Governance

As SpaceX makes history following its massive IPO, a tension has emerged between market reality and index methodology. S&P Dow Jones Indices currently maintains a rule requiring companies to have at least one year of public trading before becoming eligible for the S&P 500. This rule effectively delays the inclusion of heavyweights like SpaceX, OpenAI, and Anthropic until at least 2027.

Damodaran points out a significant paradox: while the S&P 500 is marketed as a large-cap index, it currently excludes some of the largest market-cap companies in existence. However, the "valuation guru" cautions against rushing the process. He argues that even a year after listing, these companies may still be money-losing businesses with "corporate governance horror stories" and business models that remain works in progress.

How Trillion-Dollar Additions Reshape the Index

The inclusion of such massive entities is not merely a matter of adding names to a list; it changes the very DNA of the S&P 500. Because the index is a free-float, market-cap-weighted system, adding companies of this scale will have profound implications:

  • Earnings and Risk: While the index divisor is adjusted to neutralize immediate mechanical impacts, the fundamental profile will shift toward higher risk and a near-term hit to aggregate earnings.
  • Growth Potential: The long-term trajectory of the index could see an increase in growth as these AI and space-tech leaders mature.
  • The Power Dynamic: Damodaran suggests that S&P needs these companies more than they need the index. Consequently, these firms are unlikely to bend their high-cost operations to meet strict index requirements unless the S&P relaxes its rules.

Debunking the Index Inclusion Myth

A critical takeaway for investors is the debunking of the "index inclusion windfall." Many retail and institutional investors operate under the assumption that being added to the S&P 500 guarantees a stock rally. Damodaran’s analysis of 715 additions and 711 deletions between 1995 and 2021 suggests otherwise.

The empirical evidence shows that the "bump" in stock prices following inclusion has largely disappeared over the last two decades. In fact, companies added to the index are now more likely to underperform than outperform in the 12 months following their entry. He cites Tesla’s December 2020 inclusion as a prime example, noting that the stock massively underperformed the small REIT it replaced in the index.

Key Takeaways

  • Delayed Entry: Due to existing S&P rules requiring one year of trading, mega-caps like SpaceX and OpenAI likely won't join the S&P 500 until 2027 at the earliest.
  • Altered Fundamentals: Adding trillion-dollar, loss-making companies will increase the index's overall risk profile and impact aggregate earnings.
  • Diminishing Returns: The historical "index effect"—where inclusion leads to a guaranteed price surge—has largely eroded, making index-based trading strategies increasingly unreliable.