The Trillion-Dollar Battle: SpaceX, OpenAI, and the Future of the S&P 500

As private giants like SpaceX, OpenAI, and Anthropic prepare for massive public listings, a high-stakes tug-of-war is emerging over their inclusion in the S&P 500. NYU Stern Professor Aswath Damodaran warns that integrating these trillion-dollar entities could fundamentally alter the risk and earnings profile of the world's most influential stock index.

The Dilemma of Trillion-Dollar "Work in Progress" Companies

The recent blockbuster IPO of SpaceX has ignited a debate regarding how quickly mega-cap private companies should be fast-tracked into the S&P 500. Damodaran points out a significant contradiction: while the S&P 500 aims to represent the largest US-listed companies, it currently excludes some of the market's most valuable players due to strict eligibility rules.

However, Damodaran warns that these companies are not yet stable blue-chip entities. He notes that even a year after listing, SpaceX, OpenAI, and Anthropic will likely remain "money-losing businesses" with business models that are still "works in progress." Furthermore, he describes them as potential "corporate governance horror stories," suggesting that S&P Dow Jones Indices must balance market representation with the need for profitability and stability.

S&P 500 Rules and the Delayed Entry

To manage this transition and mitigate uncertainty, S&P Dow Jones Indices has maintained its rule requiring at least one year of active trading before a company becomes eligible for the index. This decision effectively pushes the potential inclusion of SpaceX, OpenAI, or Anthropic into 2027 at the earliest.

While the index needs these companies to maintain its relevance as a "large-cap" benchmark, Damodaran argues that the power dynamic favors the companies. He suggests that these trillion-dollar giants have little incentive to bend their operations to meet index requirements if those requirements prove costly, leaving S&P to be the party that eventually adapts.

The Myth of the "Index Inclusion Windfall"

A critical takeaway for investors is Damodaran's debunking of the "index inclusion effect." Many traders believe that being added to the S&P 500 guarantees a sustained rally, but empirical data suggests otherwise. Reviewing a study of over 1,400 additions and deletions between 1995 and 2021, Damodaran highlights that the price "bump" associated with inclusion has largely disappeared over the last two decades.

In fact, he notes that 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; despite the hype, the stock massively underperformed compared to the smaller REIT it replaced in the index.

Shifting Index Fundamentals

If these massive, unprofitable companies are eventually absorbed, the impact won't be a simple mechanical change. While the index divisor is adjusted to neutralize immediate price impacts, the fundamental DNA of the S&P 500 will shift. Investors should prepare for an index characterized by higher aggregate risk, a short-term hit to total earnings, and potentially higher long-term growth projections.

Key Takeaways

• Delayed Inclusion: Due to the one-year trading rule, mega-cap IPOs like SpaceX and OpenAI will likely not enter the S&P 500 until 2027 at the earliest.
• Fundamental Shifts: Adding trillion-dollar, loss-making companies will increase the index's overall risk profile and impact its aggregate earnings.
• Vanishing Index Premium: Empirical evidence suggests that the historical price surge following S&P 500 inclusion has eroded, making "index trading" a risky strategy.