Shifting Sands: Potential New Entrants Poised to Reshape the S&P 500 in Upcoming Rebalance

TipsForTraders | May 10, 2024

Responsive image

The S&P 500 is on the cusp of its quarterly reshuffling, and Wall Street analysts have pinpointed several stocks that might secure a spot in this prestigious index next month. Gaining entry into the S&P 500 not only elevates a company’s stature but also typically bestows considerable financial benefits. According to Barclays analyst Ramsey El-Assal, stocks newly added to the index have historically enjoyed an average first-day trading bump of 7.7%. The most recent additions were Super Micro Computer and Deckers Outdoor, which took the places of Whirlpool and Zions Bancorporation, respectively, in March.

One of the main contenders for inclusion this time around is Block, the payments company that achieved eligibility following its positive net income report in the fourth quarter of 2023. While not a guaranteed selection, Block presents a compelling case, particularly due to the current underrepresentation of financial services within the S&P 500. El-Assal notes, “Financial Services is the second most underweight industry category in the index, after Software & Services. Given Block’s $45 billion market cap, it stands out as a prime candidate for inclusion.” Additionally, potential mergers and acquisitions involving current index members could further open doors for Block’s entry.

Despite a challenging year where Block’s shares have declined by about 8%, the upside remains substantial, with Barclays setting a $100 price target for the stock, indicating a nearly 40% potential increase from the current levels. The firm maintains an overweight rating on the shares.

Keefe, Bruyette & Woods echoes the sentiment regarding financial services stocks, suggesting both Square and Coinbase as potential “wild card” entrants due to their recent qualifications. Among the names, Dell is seen as the most likely new entrant because of its substantial size. Other firms like KKR and Apollo Global Management, while considered, are deemed less likely to be included.

Analyst Shreyank Gandhi from Keefe, Bruyette & Woods also anticipates changes beyond the S&P 500. He predicts that Ryan Specialty Holdings could move up to the S&P Midcap 400, while New York Community Bancorp might be shifted to the S&P SmallCap 600. Additionally, Axis Capital Holdings and BOK Financial are tagged as potential newcomers to the SmallCap 600 index.

As Wall Street prepares for these adjustments, the S&P 500 rebalance will officially take effect after the market closes on June 21, with the forthcoming changes slated to be announced on June 7.

The anticipation of these index rebalances underscores the dynamic nature of market indices, reflecting broader economic shifts and individual corporate performances. For investors, these adjustments offer strategic insights into potential value adjustments and market perceptions, signaling both opportunities and shifts in the investment landscape. As companies like Block navigate towards potential inclusion, their evolving financial narratives play a crucial role in reshaping market indices and, by extension, investment portfolios across the globe.