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

A seismic shift is approaching the world's most influential stock index as private giants like SpaceX and OpenAI prepare for public markets. NYU Stern Professor Aswath Damodaran warns that the inclusion of these trillion-dollar entities could fundamentally redefine the risk and profitability of the S&P 500.

The Conflict Between Market Cap and Index Integrity

The recent SpaceX IPO has ignited a fierce debate over how the S&P 500 should handle mega-cap companies that are still in their growth phases. While SpaceX, OpenAI, and Anthropic represent some of the largest market valuations globally, they pose a dilemma for S&P Dow Jones Indices.

Damodaran points out a glaring contradiction: the S&P 500 aims to be a large-cap index, yet it currently excludes some of the largest market-cap players in the world. However, S&P has maintained its strict rule requiring at least one year of public trading before a company becomes eligible. This policy effectively delays the potential inclusion of these AI and space titans until at least 2027, ensuring they meet liquidity and age requirements.

High Growth vs. Corporate Governance Risks

The "valuation guru" warns that fast-tracking these companies into the index comes with significant caveats. He notes that even a year after listing, companies like SpaceX and OpenAI may still be money-losing businesses with business models that remain "works in progress."

Adding such massive, often controversial, entities to the index would alter its fundamental DNA. While the mechanical impact on index levels is neutralized via divisor adjustments, the underlying fundamentals would shift toward:

  • Increased Volatility: Higher risk profiles due to speculative growth stories.
  • Earnings Pressure: A near-term hit to the aggregate earnings of the index.
  • Growth Potential: A possible long-term increase in the index's overall growth rate.

Damodaran suggests that the power dynamic is skewed; the S&P needs these trillion-dollar companies to maintain its relevance, but the companies themselves have little incentive to bend their governance or financial structures to meet index requirements.

The Myth of the Index Inclusion Windfall

For many retail and institutional investors, being added to the S&P 500 is seen as a guaranteed catalyst for a stock rally. Damodaran, however, debunks this "index inclusion windfall" myth using empirical data.

Citing a study of over 1,400 index additions and deletions between 1995 and 2021, he reveals that the price "bump" associated with inclusion has largely vanished over the last two decades. In fact, many companies tend to underperform the index in the 12 months following their entry. He highlights Tesla’s 2020 inclusion as a prime example, noting that the stock significantly underperformed the broader market following its addition.

For professional investors, the takeaway is clear: trading based on index movements is a high-risk, low-reward strategy. The real impact of SpaceX or OpenAI joining the S&P 500 will be felt in the index's aggregate risk-return profile, not through a sudden surge in individual stock prices.

Key Takeaways

  • Delayed Inclusion: Due to S&P's one-year trading rule, mega-cap IPOs like SpaceX and OpenAI likely won't enter the S&P 500 until 2027 at the earliest.
  • Fundamental Shifts: Integrating trillion-dollar, loss-making companies will increase the index's overall risk and growth profile while potentially dragging down aggregate earnings.
  • Fading Index Effect: Empirical evidence suggests the historical "price bump" from index inclusion has eroded, making it an unreliable strategy for generating alpha.