The S&P 500 stood at 7,584.31 on Friday, according to FRED data, as stock futures dipped ahead of the first monthly jobs report under new Federal Reserve Chair Kevin Warsh. The broader U.S. equity benchmark had been on a multiweek winning streak that appeared at risk of breaking.
SpaceX is scheduled to begin trading at a price that values the company at $1.75 trillion, making it one of the largest IPOs in history. The company, led by Elon Musk, combines rocket manufacturing, satellite internet through Starlink, and AI research through a recently merged business with xAI.
The decision by S&P Dow Jones Indices to decline fast-tracking means that SpaceX will need to meet the typical criteria for S&P 500 inclusion — including a longer trading history and, in some cases, profitability — before it can be added. Many passive funds that track the S&P 500 hold trillions of dollars in assets and would have been compelled to buy SpaceX shares immediately upon inclusion, creating a floor of demand often referred to on Wall Street as “forced buying” or “schmuck insurance” for active managers who benchmark to the index.
Index fund managers who must track the S&P 500 closely cannot afford to omit a stock as large as SpaceX, which at a $1.75 trillion market capitalization would rank among the top holdings in the index. Arnott, the chairman of Research Affiliates and a pioneer of fundamental indexing, described the dynamic to The Wall Street Journal, noting that “valuation-indifferent buyers queuing up who have to buy” would have provided a powerful boost.
“Any time I hear someone say the stock is going up because people have to buy it, I want to sell it to them,” Arnott said in the interview, according to the Journal. He added that while he finds SpaceX’s valuation “ludicrous,” he would personally buy the shares at the IPO price if his job allowed, acknowledging the potential for short-term gains driven by index-related demand.
The contrast between the S&P 500’s stance and the Nasdaq 100’s decision to fast-track SpaceX sets up an unusual situation. The Nasdaq 100, which is widely tracked through exchange-traded funds and institutional mandates, has already made accommodations for SpaceX’s size. S&P Dow Jones Indices, which controls the larger and more widely followed S&P 500, said it would not bend its rules for SpaceX or any other large AI-related company.
The precedent of Tesla’s addition to the S&P 500 in December 2020 illustrates the potential volatility ahead. Between March 2020, when Tesla first appeared likely to meet the index’s profitability requirement, and the following January, Tesla shares outperformed the S&P 500 by 860 percentage points. After entering the index on Dec. 21, 2020, shares initially surged further before turning into a drag on index returns for months.
SpaceX’s valuation metrics are extreme by historical standards. The company will trade at a price/sales multiple of 92 times expected revenue at its IPO price. At the peak of the dot-com bubble in early 2000, technology companies in the S&P 500 fetched an average multiple of seven times revenue. SpaceX, unlike Tesla at the time of its S&P 500 inclusion, does not report a profit. The Class of 2000 tech IPOs lost most of their value over the following three years.
Analysts quoted by The Wall Street Journal noted that retail enthusiasm, the Nasdaq 100’s helping hand, and the prospect of eventual S&P 500 inclusion — which could come after a standard waiting period of several months — might still be enough to lift SpaceX shares far above its $1.75 trillion valuation. But the loss of an immediate forced-buying catalyst, the Journal reported, means “this rocket just lost a crucial booster stage.”
The jobs report due Friday marks the first monthly employment release under Fed Chair Warsh, who took office in recent months. The federal funds rate, a key Fed policy lever, stood at an effective rate of 3.63 percent as of the latest FRED data. The labor market data could influence expectations for the path of interest rates, which in turn affect the valuations of high-growth companies like SpaceX.
Broader equity markets showed signs of stress Friday beyond the SpaceX story. Shares of companies tied to artificial intelligence, including Nvidia, Broadcom, and Marvell Technology, declined in premarket trading. Cryptocurrency-related stocks such as Coinbase Global and Robinhood Markets also fell as bitcoin extended its slide toward $60,000. Lululemon Athletica cut its annual outlook, citing a spike in negative brand commentary, sending its shares down 12 percent premarket.