The S&P Dow Jones Indices announced on Thursday, following a one-month consultation period, that its index committee has decided to keep the existing rule requiring companies to report positive net income over the past year, including the most recent quarter. This decision means that potential mega-IPO candidates, including SpaceX, are likely looking at a lengthy path to inclusion in the S&P 500 index.
According to an Evercore ISI research analyst cited by a person familiar with the matter, the rocket, satellite, and AI company founded by Elon Musk is not expected to turn an annual net profit until 2027. If the rule remains unchanged, this could delay SpaceX's inclusion in the S&P 500 until sometime in 2028.
Jay Ritter, a professor emeritus at the University of Florida and director of its IPO Initiative, stated, "These mega-IPOs will all eventually be included in the S&P 500 unless their business models fail, so the question is only one of timing." He added, "Given the low float of these companies and the massive amount of money tracking the S&P 500, I think it's a good thing to wait until there is a more liquid market for these stocks."
This decision comes as SpaceX prepares to begin trading on June 12, targeting a valuation of $1.8 trillion. If achieved, its market capitalization would surpass all but six current constituents of the S&P 500 and would be higher than Musk's other company, Tesla Motors (TSLA.US). Meanwhile, SpaceX is expected to be added to several other indices, including the Nasdaq 100, as soon as the end of this month.
Unlike the S&P, Nasdaq has already modified its rules, shortening the waiting period for inclusion in the Nasdaq 100 index from at least three months to 15 trading days. FTSE Russell has taken a similar approach, reducing its waiting time to five trading days.
A Balancing Act
It is reported that Anthropic and OpenAI are also considering IPOs as early as this year. Despite market expectations that both could be valued over $1 trillion post-listing, they may face similar hurdles to SpaceX. Whether these AI model developers can enter the benchmark S&P 500 will depend on balancing operational performance with expenditures.
Anthropic is reportedly projected to post operating income of $559 million for the quarter ending June, but due to significant increases in spending on computing resources and other costs, it does not necessarily expect to remain profitable in subsequent quarters. OpenAI is not expected to become profitable for several years.
Lawrence Creatura, a portfolio manager at PRSPCTV Capital, noted, "From a corporate strategy perspective, it's not unreasonable to choose to operate at a loss." He cited large companies like Amazon and Uber, which were also added to the index years after going public. He said, "It means you can't get into the S&P 500 for a while, but look at those companies now."
According to former senior S&P Dow Jones index analyst Howard Silverblatt, the S&P 500 aims to reflect the U.S. domestic equity market. He stated that maintaining the profitability requirement "is one of the hardest rules for S&P to defend," but he believes the GAAP earnings requirement is beneficial for the index. He pointed out that "some companies spend more on R&D than their level of profits, even if they have profitable business lines," adding that SpaceX is one such company.
Goldman Sachs and Evercore ISI research teams project SpaceX's capital expenditures will surge from over $20 billion last year to more than $360 billion by 2030. Furthermore, according to people familiar with the matter, the Goldman team expects SpaceX to turn positive free cash flow to over $72 billion by 2031, after hitting a low of negative $105 billion in 2029.
Estimates suggest that if these companies could be added to the S&P 500 quickly, passive funds would be forced to buy approximately $14 billion of SpaceX stock, over $8 billion of OpenAI stock, and nearly $9 billion of Anthropic stock.
S&P Dow Jones Indices' decision to stick with the existing rules has left some market observers dissatisfied, while others are relieved the rule was preserved. For Michael Antonelli, a market strategist at Baird, the decision does not change the market's view of the index at all. He stated, "Frankly, it is the world's premier equity market index, the gold standard for global equity indices." He added, "They have clear rules on profitability and index inclusion, and they are just sticking to them. I don't think they are willing to change rules that are written into the core mechanics of their product just because it's Musk and SpaceX."
The Power of Index Gatekeepers
Elon Musk has previously stated that passive investing has "gone too far," mocked ESG indices as a "scam," and endured a long wait before Tesla was added to the S&P 500. Now, the world's most influential benchmark index provider has given him a new reason for discontent—and a reminder that some of Wall Street's most impactful decisions are made by index compilers.
The proposal rejected by S&P Dow Jones Indices on Thursday would have created a faster path for large new public companies to enter the S&P 500. The existing 12-month waiting period remains, meaning SpaceX will not be eligible for inclusion until at least next year. This decision prevents Musk's rocket company and similar firms from immediately accessing one of the largest and most stable sources of demand in modern markets: the trillions of dollars tied to the world's most-watched stock index.
This is unlikely to affect SpaceX's potential path to becoming the largest IPO in history. However, S&P's decision represents the first significant institutional pushback since Wall Street's ecosystem began reorganizing around the wave of trillion-dollar private company listings in recent years.
The decision also highlights a core tension in passive investing. Index providers are supposed to be mirrors of the market, but the choice of whether to include a large company that already holds unavoidable economic importance at its IPO becomes a market-moving judgment in itself.
Campbell Harvey, a finance professor at Duke University, said, "This is a calculated gamble." He explained, "The downside risk is if they include late and investors miss out on explosive gains after June 12. The other scenario is they include late because SpaceX stock falls 50% over the next 12 months. So it is effectively an active decision."
The impact extends far beyond SpaceX. OpenAI and Anthropic, which are also advancing toward public listings, would be similarly affected. This means some of the most important companies of the AI era could remain outside the core benchmark of the global passive investment system for 12 months or longer.
This leaves investors with a dilemma passive investing was designed to avoid: buy these stocks and risk chasing high valuations, or stick to tracking the index and potentially miss some of the market's most significant new listings.
The Rising Dominance of Indexing
The question is whether index providers should adapt to a new era where disruptive companies stay private for much longer than in the past. Proponents of faster inclusion argue that trillion-dollar companies can become essential to the economic fabric before meeting traditional index criteria. Opponents believe profitability screens, float requirements, and observation periods exist precisely to prevent investors from being forced to buy at the peak of market euphoria.
Melissa Roberts, managing director of index rebalancing and strategic opportunities research at Stephens, stated, "One of the key distinctions between S&P and other index providers is that it has an earnings requirement." She added, "Methodology consistency is paramount, and that's what S&P has shown us here."
For those who support S&P's stance, this consistency is key. If rules are rewritten for the largest and most popular companies, they lose credibility. David Blitzer, who chaired the S&P Dow Jones Index Committee from 1995 to 2019, said index providers ultimately answer to the investors using their indices, not the companies seeking inclusion. He stated, "At the end of the day, I think the index provider has to focus on its customers." He noted that firms like Vanguard, State Street, and BlackRock build products around the index, adding, "If you want to own SpaceX, just buying an index fund isn't going to give you much exposure."
Tesla was one of the most emblematic index inclusion stories of the last cycle. Despite its soaring market cap, it still had to meet S&P's traditional thresholds, including four consecutive quarters of profitability and approval from the index committee. SpaceX may become the largest test case yet for whether investors can truly wait for index inclusion.
In fact, according to analysis by index rebalancing forecaster Intropic, even after a full year, SpaceX may not immediately qualify for the S&P 500 due to the earnings requirement. It could even become the largest "unrepresented" public company before meeting the profitability threshold. Intropic analysts wrote, "This move actually shows a refreshing adherence to principle." They added, "Looking at the history of S&P 500 additions, they have indeed been happy to wait patiently."
Even without entering the S&P 500, Intropic estimates that if other major indices include SpaceX, it could still see roughly $23 billion in passive demand in its first three weeks of trading. Celia Fseil, head of equity market neutral strategy at asset manager Candriam, noted the market had anticipated an additional $12 billion inflow if a fast track to the S&P 500 had been opened. She views this wait as consistent with S&P's style. Fseil said, "It was the last among its peers to launch a consultation on mega-cap IPOs and has always leaned towards retaining a degree of unpredictability."
For active fund managers, S&P's decision eliminates one risk but creates another. Managers bearish on SpaceX can now avoid the stock without immediately underperforming their benchmark. But if SpaceX rallies post-IPO, those managers may have to explain to clients why they missed one of the market's most important new listings.
This tension arises as actively managed funds are becoming more like the benchmarks they track. According to Bank of America data, the Active Share ratio—a measure of how different an active portfolio is from the S&P 500—has fallen to its lowest level since the global financial crisis.
Whether S&P ultimately made the right call may not be known for years. A more pressing question for investors now is: what to do in the meantime? Celia Fseil stated, "From a practical standpoint, this IPO is simply too large to ignore. We wouldn't be surprised to see some active managers with moderate flexibility try to get a small piece of the trade."
Despite the intense focus on S&P's ruling, the final outcome still largely rests in Musk's hands. If SpaceX delivers on the market's expectations for what could become the largest IPO ever, the company will likely enter the S&P 500 eventually, regardless of when the clock starts. David Blitzer said, "The ball is in his court." He concluded, "What matters most is how the stock performs over the next few years and how the company performs operationally."
Comments