The Trillion-Dollar Battle for the S&P 500: Damodaran’s Warning

The landscape of global investing is facing a seismic shift as private giants like SpaceX and OpenAI prepare to enter the public markets. NYU Stern Professor Aswath Damodaran warns that the battle to include these trillion-dollar entities in the S&P 500 could fundamentally alter the index's risk profile and the very nature of passive investing.

The Tug-of-War Over Index Inclusion

With SpaceX having completed a historic IPO in June 2026, and AI heavyweights like OpenAI and Anthropic following suit, a dilemma has emerged for S&P Dow Jones Indices. The index faces a paradox: it claims to represent the largest US-listed companies, yet it currently excludes some of the most significant market-cap leaders due to strict eligibility rules.

However, Damodaran notes that S&P is playing a cautious game. To mitigate uncertainty, the index provider has reaffirmed its rule requiring at least one year of public trading before a company becomes eligible. This means that even if SpaceX, OpenAI, or Anthropic list in 2026, they likely won't see inclusion in the S&P 500 until 2027 at the earliest.

Risks of Fast-Tracking Trillion-Dollar Giants

The core of Damodaran's critique lies in the financial health and governance of these upcoming giants. He points out that even a year after listing, companies like SpaceX and OpenAI may still be money-losing businesses with "business models that are still works in progress."

Integrating these massive, potentially volatile companies into a market-cap-weighted index carries significant consequences:

  • Earnings Impact: Inclusion could lead to a near-term hit to the index's aggregate earnings.
  • Risk Profile: Adding companies with "corporate governance horror stories" will inherently increase the index's risk.
  • Growth Potential: While risky, their inclusion could provide a long-term boost to the index's growth metrics.

Damodaran argues that the power dynamic has shifted; S&P needs these companies to maintain its relevance as a "large-cap" benchmark more than these companies need the index.

Debunking the "Index Inclusion Windfall" Myth

A critical takeaway for retail and institutional investors is the diminishing return of "index inclusion plays." Many investors historically sought to buy stocks immediately before they were added to the S&P 500, expecting a guaranteed rally.

Drawing on data from 715 additions and 711 deletions between 1995 and 2021, Damodaran highlights that the "index effect" has largely evaporated. In the last two decades, the short-term price bump from inclusion has steadily eroded. In fact, he notes that companies added to the S&P 500 are now more likely to underperform than outperform in the 12 months following their entry. He cites Tesla’s 2020 inclusion as a prime example, where the stock significantly underperformed the index post-entry.

Key Takeaways

  • Delayed Inclusion: Due to S&P's one-year trading rule, mega-caps like SpaceX and OpenAI will not enter the S&P 500 until at least 2027.
  • Structural Shift: Adding trillion-dollar, money-losing companies will increase the index's risk and impact its aggregate earnings and growth profile.
  • Diminishing Returns: The historical "price bump" associated with joining the S&P 500 has largely disappeared, making "index inclusion" a risky basis for trading strategies.