The traditional gateways to the S&P 500, long guarded by criteria designed to ensure stability and profitability, appear to be shifting. S&P Dow Jones Indices recently initiated a “Consultation on the Treatment of MegaCap Companies,” signaling a potential re-evaluation of long-standing entry requirements. This move could pave the way for high-valuation, yet currently unprofitable, firms like SpaceX, OpenAI, and Anthropic to join the ranks of America’s largest index sooner than previously possible, particularly as these companies approach public offerings.
Historically, inclusion in the S&P 500 has mandated that a company demonstrate positive earnings over its last four quarters, including the most recent one. This profitability rule, alongside a 12-month “seasoning period” for newly public companies and a minimum float requirement ensuring at least 10% of shares are actively traded, has served as a quality filter. These safeguards were intended to present index investors with a curated list of established, financially sound enterprises, allowing time for market volatility to subside post-IPO, and ensuring sufficient liquidity for institutional buying.
However, the proposed changes outlined in the consultation document suggest a willingness to waive certain requirements for “MegaCaps”—defined as companies with a market capitalization at least equivalent to the 100th-largest name in the S&P Total Market Index, roughly $112 billion. For such entities, the profitability test could be entirely set aside, and the seasoning period shortened to six months. The minimum float requirement, or 0.10 Investable Weight Factor, is also under review for potential modification. These adjustments arrive at a crucial juncture, as SpaceX has released its S-1 filing, Anthropic has filed for an IPO, and OpenAI is rumored to follow suit next quarter. None of these companies currently report profits; SpaceX, for instance, recorded billions in losses last year.
The implications of such rule changes are substantial, particularly for the vast pools of capital tracking these indices. An estimated $20 trillion is indexed or benchmarked to the S&P 500, with passive funds accounting for approximately $13 trillion of that total as of December 2024. When a company is added to an index, passive funds are compelled to purchase its stock, regardless of price, to maintain their tracking integrity. This forced buying can become particularly disruptive when a company with a massive valuation enters with a limited public float. SpaceX, for example, is anticipated to float only about 5% of its stock while commanding a valuation near $1.75 trillion.
Nell Minow, a long-standing expert in corporate governance, has voiced concerns about these potential alterations, stating that such moves run counter to the fundamental purpose of an index. She argues that an index is meant to simplify investment decisions by pre-qualifying companies based on specific criteria, and that bending these rules for certain firms undermines that trust. The Nasdaq-100 recently adopted its own “Fast Entry” rule, allowing large IPOs into its index after just 15 trading days. Goldman Sachs analysts projected that this change could trigger up to $60 billion in forced buying within the Nasdaq-100 alone. The S&P 500, with its significantly larger asset base, would likely see even greater capital flows.
The consultation period for these potential rule modifications recently closed, with comments submitted by May 28. If adopted, the changes could take effect as early as June 8, just ahead of SpaceX’s anticipated Nasdaq trading debut on June 12. The scenario raises questions about market efficiency and investor protection, especially for the ordinary retirement accounts that are often passively invested in these broad market indices. It remains to be seen how the largest institutional investors, such as major state retirement funds, will react if these foundational rules are indeed re-written to accommodate a new generation of high-growth, high-valuation, yet unprofitable, technology giants.
