This cuts straight to the throat of why everyday people remain stuck in the dark. The professional money managers love to build a smokescreen of complexity around index inclusion, using heavy vocabulary and fear to make retail investors feel completely unqualified to manage their own futures. It is an old, tired shield designed to keep people paying high fees for "expert protection." But you just proved the most grounding rule of everyday life: an index isn't a curated country club for perfect businesses. It is just a basic mirror of reality on the ground. Looking past the institutional noise to show that a global basket should simply reflect the real world—without the paternalistic filters—is incredibly refreshing. Brilliant breakdown. 🌍🔑
Index addition forces passive buying at whatever multiple the market sets, divorced from fundamentals. For names this richly valued, that is a structural risk to new index holders, not a tailwind. Float and lockup mechanics will tell the real story.
The rules were put in place for a reason(s) after carefully evaluating the implications. Why do they need to be changed for one company, irrespective of however large it appears to be at this moment?
Time will prove or disprove the current valuation, and at the 12-month timeframe, you will have a much clearer (and more stable) picture.
The fading index inclusion effect is the most important data point here and the one most retail investors will miss entirely. The narrative going into the SpaceX IPO was that S&P 500 inclusion would create a massive wave of forced passive buying. Your data from the S&P study shows the opposite has been happening as the price bump from inclusion has shrunk as passive investing has grown, not expanded. Tesla massively underperforming both the S&P 500 and the company it replaced in the twelve months after inclusion is the most useful data point for anyone making a buy decision based on the index inclusion narrative right now.
Honestly the fact that people were citing Goldman, JPM, Citi, etc forecasts of 'trillion dollar sales figures' in the near term from SPCX as evidence that it was a good IPO buy at $2T really shows how people are very willing to engage in cognitive dissonance when they want to convince themselves that their gambler-style stock purchases are actually educated. All of those banks were part of the underwriting syndicate, it's literally their job to ensure the price at IPO is strong, the trading afterward is stable and rising, and that their clients are satisfied after they buy. Even after the syndicate makes their fee at IPO, if the stock sinks after, they look bad for pitching an overvalued business to their clients and effectively dumping it onto them to collect an inflated fee. In essence, be careful who you trust. These banks don't publish numbers and forecasts to be charitable. They are priming the markets for IPOs the same way cows are fattened for slaughter.
Sir, thanks for the detailed and informative article.
Your conclusions in the "index inclusion boost" section based on Tesla's example seem to omit an important aspect: Tesla's meteoric price increase during the months leading up to the actual announcement of its inclusion.
You have rightly pointed out that the boost from index inclusion has diminished in recent years - but that's largely a result of increasing market efficiency. And this same market efficiency means that the market gets ahead of the news and, with increasing accuracy, anticipates future changes to the index.
Tesla is actually a good counter-example to what you say here: it actually benefit greatly from the index inclusion, though the benefits largely came before the actual inclusion. (But of course correlation is not the same as causation, and I admit my statement here cannot be definitely proven!)
I believe that the same dynamic is playing out here with SpaceX now, and will probably play out with Anthropic and OpenAI when they list. Their stock prices, both during the IPO process and afterwards, will benefit from the anticipation of future index inclusion, in much the way Tesla benefited in 2020. This of course doesn't mean that investors who keep holding the shares after the actual index inclusion would be happy with the returns in the long term - but those who buy before it happens are likely to benefit, if they manage to sell out at the higher prices to suckers who just happen to follow the index.
Lastly, one more point which I would like to make that you did not mention in your article: as someone with a significant part of my portfolio in index funds, my main grouse is not the index inclusion itself, but the seemingly arbitrary way in which indices are changing their own rules for the specific benefit of these companies. I would have been fine if SpaceX, etc. just happened to be added to the indices my funds track based on their long-existing and transparent rules. But the way the index providers are arbitrarily making significant changes to their methodologies is disappointing to say the least. (S&P Dow Jones seems to be holding their ground at least so far - it would have been great if others too had the same conviction in their own processes and systems!)
Bloomberg and the FT report today (19th June) that SpaceX is looking to issue $20bn of bonds, “expected to be priced at roughly 1.35–1.5 percentage points above US Treasuries”, supported by a Baa1 investment-grade rating (remarkable!)
I wonder how many companies in recent history have been loss-making, expected to remain loss-making for the next few years, yet still commanded an investment-grade rating.
It would be great to hear your perspective, and what synthetic rating you would assign to SpaceX!
The one-year trading requirement makes sense as a price-discovery buffer, but it assumes a normal float. SpaceX has a 4% free float with a lockup running through December 2026. For the first six months of its trading life, 96% of shares aren't available to trade, which means the price being discovered is the price that a thin slice of the equity is willing to accept from an even thinner slice of buyers. That's not the kind of price discovery the waiting period was designed to produce.
So when S&P looks at SpaceX in June 2027, it will be evaluating a stock that had genuine, full-float price discovery for roughly the back half of that year. The other half was a low-float momentum game on a fraction of the equity. The year-of-trading rule implicitly assumes the trading is representative, and right now it isn't. Whether that matters for the inclusion decision depends on whether S&P views the requirement as a calendar condition or a price-discovery condition, and those are different standards that point to different answers.
I believe that for an index to truly reflect the market's evolution, it must embrace these new giants based on their economic weight rather than trying to protect anybody from their inherent volatility.
What about the link between the 'owners' and their right/obligation to vote on corporate matters. Don't we concentrate the decisions in the hands of a couple or large 'governance' firms? Not sure if this is a real negative but worth a consideration.
From one side it does make sense that there should be changing of rules but on the other side we never had even remotely similar situation in the market where you have such a huge players going public. I just cannot see any of these companies making profits for a long time but that is exactly why they need market. It seens like that this time we as humans and investors got ahead of ourselves but eventually we will get there but not so fast. AI is real space x is real but timeframes are off completely.
Here comes Prof. Damodaran with some good old financial advice: diversification. What I admire most is his ability to use simple, timeless principles to analyze modern markets and cut through the noise of superficial and trendy narratives.
A key issue is what three multi-trillion-dollar AI positions do to the index's variance profile. Passive investors expecting diversification end up absorbing venture-style risk. At what point does the S&P stop being a wealth preservation vehicle and start being an AI sentiment trade?
This cuts straight to the throat of why everyday people remain stuck in the dark. The professional money managers love to build a smokescreen of complexity around index inclusion, using heavy vocabulary and fear to make retail investors feel completely unqualified to manage their own futures. It is an old, tired shield designed to keep people paying high fees for "expert protection." But you just proved the most grounding rule of everyday life: an index isn't a curated country club for perfect businesses. It is just a basic mirror of reality on the ground. Looking past the institutional noise to show that a global basket should simply reflect the real world—without the paternalistic filters—is incredibly refreshing. Brilliant breakdown. 🌍🔑
Index addition forces passive buying at whatever multiple the market sets, divorced from fundamentals. For names this richly valued, that is a structural risk to new index holders, not a tailwind. Float and lockup mechanics will tell the real story.
The rules were put in place for a reason(s) after carefully evaluating the implications. Why do they need to be changed for one company, irrespective of however large it appears to be at this moment?
Time will prove or disprove the current valuation, and at the 12-month timeframe, you will have a much clearer (and more stable) picture.
The fading index inclusion effect is the most important data point here and the one most retail investors will miss entirely. The narrative going into the SpaceX IPO was that S&P 500 inclusion would create a massive wave of forced passive buying. Your data from the S&P study shows the opposite has been happening as the price bump from inclusion has shrunk as passive investing has grown, not expanded. Tesla massively underperforming both the S&P 500 and the company it replaced in the twelve months after inclusion is the most useful data point for anyone making a buy decision based on the index inclusion narrative right now.
Honestly the fact that people were citing Goldman, JPM, Citi, etc forecasts of 'trillion dollar sales figures' in the near term from SPCX as evidence that it was a good IPO buy at $2T really shows how people are very willing to engage in cognitive dissonance when they want to convince themselves that their gambler-style stock purchases are actually educated. All of those banks were part of the underwriting syndicate, it's literally their job to ensure the price at IPO is strong, the trading afterward is stable and rising, and that their clients are satisfied after they buy. Even after the syndicate makes their fee at IPO, if the stock sinks after, they look bad for pitching an overvalued business to their clients and effectively dumping it onto them to collect an inflated fee. In essence, be careful who you trust. These banks don't publish numbers and forecasts to be charitable. They are priming the markets for IPOs the same way cows are fattened for slaughter.
Sir, thanks for the detailed and informative article.
Your conclusions in the "index inclusion boost" section based on Tesla's example seem to omit an important aspect: Tesla's meteoric price increase during the months leading up to the actual announcement of its inclusion.
You have rightly pointed out that the boost from index inclusion has diminished in recent years - but that's largely a result of increasing market efficiency. And this same market efficiency means that the market gets ahead of the news and, with increasing accuracy, anticipates future changes to the index.
Tesla is actually a good counter-example to what you say here: it actually benefit greatly from the index inclusion, though the benefits largely came before the actual inclusion. (But of course correlation is not the same as causation, and I admit my statement here cannot be definitely proven!)
I believe that the same dynamic is playing out here with SpaceX now, and will probably play out with Anthropic and OpenAI when they list. Their stock prices, both during the IPO process and afterwards, will benefit from the anticipation of future index inclusion, in much the way Tesla benefited in 2020. This of course doesn't mean that investors who keep holding the shares after the actual index inclusion would be happy with the returns in the long term - but those who buy before it happens are likely to benefit, if they manage to sell out at the higher prices to suckers who just happen to follow the index.
Lastly, one more point which I would like to make that you did not mention in your article: as someone with a significant part of my portfolio in index funds, my main grouse is not the index inclusion itself, but the seemingly arbitrary way in which indices are changing their own rules for the specific benefit of these companies. I would have been fine if SpaceX, etc. just happened to be added to the indices my funds track based on their long-existing and transparent rules. But the way the index providers are arbitrarily making significant changes to their methodologies is disappointing to say the least. (S&P Dow Jones seems to be holding their ground at least so far - it would have been great if others too had the same conviction in their own processes and systems!)
Bloomberg and the FT report today (19th June) that SpaceX is looking to issue $20bn of bonds, “expected to be priced at roughly 1.35–1.5 percentage points above US Treasuries”, supported by a Baa1 investment-grade rating (remarkable!)
I wonder how many companies in recent history have been loss-making, expected to remain loss-making for the next few years, yet still commanded an investment-grade rating.
It would be great to hear your perspective, and what synthetic rating you would assign to SpaceX!
Thank you, full of insights, great take as always!
Have a great day!
Mav
The one-year trading requirement makes sense as a price-discovery buffer, but it assumes a normal float. SpaceX has a 4% free float with a lockup running through December 2026. For the first six months of its trading life, 96% of shares aren't available to trade, which means the price being discovered is the price that a thin slice of the equity is willing to accept from an even thinner slice of buyers. That's not the kind of price discovery the waiting period was designed to produce.
So when S&P looks at SpaceX in June 2027, it will be evaluating a stock that had genuine, full-float price discovery for roughly the back half of that year. The other half was a low-float momentum game on a fraction of the equity. The year-of-trading rule implicitly assumes the trading is representative, and right now it isn't. Whether that matters for the inclusion decision depends on whether S&P views the requirement as a calendar condition or a price-discovery condition, and those are different standards that point to different answers.
I believe that for an index to truly reflect the market's evolution, it must embrace these new giants based on their economic weight rather than trying to protect anybody from their inherent volatility.
Seeing SpaceX performance, maybe funds made the right call not to invest in it: https://thepensionbrief.substack.com/p/pension-funds-missing-out-on-spacex?utm_source=app-post-stats-page&r=8lenmy&utm_medium=ios
Thank you Prof.
What about the link between the 'owners' and their right/obligation to vote on corporate matters. Don't we concentrate the decisions in the hands of a couple or large 'governance' firms? Not sure if this is a real negative but worth a consideration.
From one side it does make sense that there should be changing of rules but on the other side we never had even remotely similar situation in the market where you have such a huge players going public. I just cannot see any of these companies making profits for a long time but that is exactly why they need market. It seens like that this time we as humans and investors got ahead of ourselves but eventually we will get there but not so fast. AI is real space x is real but timeframes are off completely.
Thank you for writing so lucidly in the section how the 'experts' are both "misguided and condescending." I couldn't agree more.
Here comes Prof. Damodaran with some good old financial advice: diversification. What I admire most is his ability to use simple, timeless principles to analyze modern markets and cut through the noise of superficial and trendy narratives.
A key issue is what three multi-trillion-dollar AI positions do to the index's variance profile. Passive investors expecting diversification end up absorbing venture-style risk. At what point does the S&P stop being a wealth preservation vehicle and start being an AI sentiment trade?