The positive Q3 earnings released this month by Uber (UBER) and Palantir (PLTR), have given the companies a pass in all eligibility criteria for S&P 1500 resulting in their potential addition to the S&P 500 at the upcoming December 2023 quarterly review.
However, the timing and selection of eligible securities is uncertain due to the index committee’s discretionary decision. Other scenarios include zero additions to the S&P 500 like last December 2022, or the committee’s selection of an existing eligible company from previous reviews, with the main candidates being Dell Technologies (DELL) followed by Cheniere Energy (LNG).
In the case of an S&P 500 addition, SolarEdge Technologies (SEDG) is currently the most likely to get replaced and demoted to S&P Small Cap 600. Next in line are Alaska Air Group (ALK), Sealed Air Corporation (SEE) and Zions Bancorporation (ZION). Sealed Air Corporation has already been announced as a demotion from MSCI Standard to Small a few days ago for the MSCI November review.
Even though it is likely that there will be additional transitions in S&P Mid-Cap 400 and S&P Small-Cap 600, this analysis covers only S&P 500 implications.
Announcement date for S&P 1500 transitions is on 1 December 2023 and the trade date where passive fund flows are expected to be materialised is on 15 December 2023.
The financial viability eligibility criterion of S&P 1500 states that the sum of the company’s most recent four consecutive quarters’ GAAP earnings should be positive as should the most recent quarter. Uber and Palantir satisfied these conditions for the first time at the beginning of November 2023, when they filed positive GAAP earnings for Q3. Since these companies also satisfy the rest of the eligibility criteria including liquidity, exchange listing and market capitalization, this makes them two of the main candidates for addition to the S&P 500.
The other main candidates which have been satisfying all of the criteria from previous reviews are Dell Technologies and Cheniere Energy. Top of the list is Uber with ~85% distance above the S&P 500 market capitalization threshold followed by Dell with ~72%. Additionally, Uber’s ‘Industrials’ sector is underrepresented in S&P 500 by 1% compared to Dell’s and Palantir’s ‘Information Technology’ sector which is more balanced. However, despite Uber’s significant market capitalization distance above threshold and underrepresentation of its sector, its addition is still uncertain because it just became eligible. Based on previous evidence companies sometimes get added a few months or even a year after they first become eligible. For example Airbnb first became eligible in September 2022 with a ~75% distance above the threshold, yet got added in September 2023.
Expected passive fund demand is over $17bn and 17 days of volume for Uber, $3bn with 8 days of volume for Dell, nearly $6bn with over 5 days of volume for Palantir, and $6.5bn with 27 days of volume for Cheniere Energy.
In the scenario of any additions, the first to get replaced will be SolarEdge Technologies as it is the lowest ranked S&P 500 constituent in terms of market capitalization with an astonishing distance of ~250% below threshold, followed by Alaska Air Group with ~230%. These companies will get deleted from S&P 500 and demoted straight to S&P Small-Cap 600 based on the S&P 1500 market capitalization thresholds.
In the scenario of the companies migrating from S&P 500 to S&P Small-Cap 600, they might experience a passive fund demand because our calculated trackings are higher for S&P Small-Cap 600. Passive funds sometimes own a larger percentage of the smaller market cap index since the percentage ownership will be larger with the same dollar amount of AUM. An example of that is the case of Euro STOXX 50 having a higher tracking than STOXX Europe 50.
Expected passive fund supply from an S&P 500 deletion is over $650m with 3.4 days of volume for SolarEdge Technologies, and over $700m with 9.4 days of volume for Alaska Air Group.
Expected passive fund demand from an S&P Small-Cap 600 addition is over $800m with 4.2 days of volume for SolarEdge Technologies, and nearly $900m with 9 days of volume for Alaska Air Group.