Wall Street analysts are closely monitoring the potential changes in the S&P 500’s lineup as the index prepares for its quarterly rebalance next month. Some stocks appear well-positioned for inclusion, bringing not only prestige but also significant financial benefits. Historically, stocks added to the index have seen an average increase of 7.7% in their value on the first trading day following their inclusion, as noted by Ramsey El-Assal, an analyst at Barclays. Super Micro Computer and Deckers Outdoor are recent examples, having joined the index in March, replacing Whirlpool and Zions Bancorporation, respectively.
One of the front-runners for inclusion this time around is Block (SQ), which recently became eligible after posting positive net income in the fourth quarter of 2023. The financial services sector, where Block operates, is currently underrepresented in the S&P 500, making it a strong candidate for inclusion. “Financial Services is the second most underweight industry category represented in the S&P 500 index currently,” El-Assal stated, highlighting the potential for Block, with its $45B market cap, to fill this gap.
Furthermore, potential mergers and acquisitions involving existing index members could open up additional spots. As of the latest data, Block’s shares have decreased by about 8% this year, yet Barclays maintains an overweight rating on the stock, with a price target suggesting nearly a 40% upside from Wednesday’s close.
Keefe, Bruyette & Woods also anticipates additions in the financial services sector. Analyst Shreyank Gandhi names Square and Coinbase as possible wild cards for inclusion due to their recent eligibility and the index’s preference for newly qualified entities. Gandhi further speculates that Dell, given its substantial size, is the most likely candidate to join the S&P 500.
Conversely, other firms like KKR and Apollo Global Management are seen as less likely to make the cut. Gandhi also mentions a “mid to high probability” of Erie being included in the S&P 500. Aside from the major index, there are also potential shifts in the S&P Midcap 400 and S&P SmallCap 600, with Ryan Specialty Holdings and Axis Capital Holdings noted as probable new entrants.
The upcoming rebalance, which is scheduled to take effect after the market closes on June 21, with announcements due on June 7, is expected to significantly influence the market dynamics. These anticipated changes highlight the continual evolution and adjustment of major indices, reflecting the shifting landscapes of industries and markets.
