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This is very inside baseball but it’s really important if you invest in stocks using a passive S&P 500 index or are trying to make sense of the market’s performance right now.
The coronvirus recession is going to force a huge revision in the membership of the world’s most influential passive index. DataTrek Research told Bloomberg that it sees more than 30 companies on the edge of removal in the aftermath of the global coronavirus pandemic. . Market cap guidelines for the large-cap S&P 500 index were raised to $8.2 billion on February  20, 2019. After the latest stock rout, about a fifth of companies in the index no longer meet that standard.
And the effect of the delations and the replacements will have a huge effect on index performance.
According to a Bloomberg post by Sarah Ponczek on May 16, an equal-weight basket made up of companies that were booted from the S&P 500 over the past three years (for reasons other than acquisitions) is down 47% this year. That’s almost five times more than the benchmark’s 2020 decline. Only five of the deleted stocks have posted positive returns, while half have plunged 40% or more. Delated oil and gas companies including Chesapeake Energy and Transocea are still off by 80% or more. Delated retailers Bed Bath & Beyond and Macy’s. are down roughly 70%.
As Ponczek writes “Of course, these companies were already in some form of trouble before the coronavirus struck, hence their removal. But the fact that they belong to industries directly in the cross-hairs of the fallout, where demand is waning, has been lucky for anyone with passive exposure to the market in, say, an S&P 500 ETF.”
This year the recovery in the S&P 500 since March is largely a result of its weighting s weighting in technology and health-care stocks. “Less appreciated,” according to Ponczek “is the impact of four dozen company ejections over the last three years, deletions that centered on retail, industrial and energy companies, which have struggled the most during the virus.”
What’s the likely effect of the S&P 500 revisions this year?
The index committee probably won’t add a lot more technology stocks to the index. The S&P 500 Information Technology sector already makes up 26% of the index, the highest share since the dot-com burst. But it is likely that the index will be even more weighted toward megacaps in technology and healthcare. Every member of the FAANG technology group has posted a positive return for 2020 to date. And post-coronavirus, healthcare looks likely to outperform and to see additional stocks join the index. (One requirement for addition is that the sum of earnings for the lat four quarters must be positive.)
