The S&P 500 is the most well-known index in the US and possibly the world. It is often used as a gauge for the US economy since it accounts for about 80% of all available US equity market caps.
The index’s value is calculated and published in real-time from market open (9:30 a.m. EST) to market close (4 p.m. EST) every weekday, excluding public holidays.
So, what exactly is the S&P 500, how is it calculated, and why is it important?
What Is The S&P 500?
The S&P (Standard & Poor’s) 500 is a stock market index that comprises the 500 largest US companies. The index is based on company size (market capitalisation) and tracks the companies’ performance.
Despite being called the S&P 500, the index has 503 constituents. This is because three companies in the index have two classes of shares. For example, Alphabet, the parent company of Google, has Class A (ticker: GOOGL) and Class C (ticker: GOOG) shares listed on the market.
The S&P 500 was launched in March 1957, and its name reflects the merger of two companies: StandardStatistical Bureau and Poor’s Publishing.
The index forms part of the S&P Dow Jones US Equity Indices. Other indices include the following.
- S&P MidCap 400 – measures the performance of 400 mid-sized companies (companies with market capitalisations between $1 and $6.7 billion).
- S&P SmallCap 600 – measures the small-cap segment of the US market (companies with market capitalisations between $6.7 and $18 billion).
- S&P Composite 1500 – combines the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indices. These 1,500 companies cover about 90% of all US equity market capitalisations.
How Is The S&P 500 Value Calculated?
Because the S&P 500 tracks the performance of the 500 largest US companies, its value reflects the fluctuations of its constituents’ share prices. When overall prices rise, so will the value of the index. When overall prices fall, so will the index’s value.
However, not all companies have the same effect on the index’s value—a company’s index weighting determines its influence. Price movements of higher-weighted companies like Microsoft, Nvidia, and Apple will have a higher impact than those of American Airlines and eBay.
How Are Company Weightings Calculated?
The S&P 500 is a float-adjusted market capitalisation-weighted index. Therefore, a company’s index weighting is determined by its float-adjusted market cap.
For context, float-adjusted market capitalisation is the total value of a company’s shares that the public can trade. Some companies may have a secondary class of shares to ensure the company retains the majority vote on business decisions or for executive rewards. The S&P 500 disregards those shares.
After this adjustment, a company’s index weighting is calculated by dividing its market capitalisation by the total index market capitalisation. For example, if Company A has a float-adjusted market capitalisation of $100 billion and the S&P 500 index has a total market capitalisation of $1 trillion, Company A’s index weighting will be 10% (100 billion / 1 trillion).
On any given day, Company A’s price change will account for 10% of the index’s change in value.
Why Is The S&P 500 Important?
As alluded to earlier, the S&P 500 is often used to gauge the health of the US economy. When the index performs well, it suggests a healthy and growing economy, whereas poor performance can indicate economic concerns and uncertainties.
Other reasons include the following.
Benchmark for Investment Performance
Fund managers and individual investors often use the S&P 500 to compare their portfolio performance.
Because of its historical returns and stature in global markets, the S&P 500 influences an investor’s portfolio performance targets. If an investor’s curated stock portfolio underperforms the S&P 500, it would’ve been better (in hindsight) to invest in a fund that tracks the index.
Basis for Passive Investing
The rise of index and exchange-traded funds that track the S&P 500 has made investing relatively easier and more accessible.
These funds allow investors to own pieces of the 500 largest US companies without owning them individually. This makes passive investing a popular choice—investors are comfortable growing with the market rather than trying to outperform it.
Historical Data
The S&P 500 provides almost 70 years of history to look back on and analyse.
The index provides decades of data for the detail-oriented investor (or historian) to explore. Since its launch in 1957, the index has captured several market cycles, recessions, crashes, and recoveries.
The index’s history allows investors to study trends and market behaviour, helping them reasonably understand current market sentiment, risk and the magnitude of potential future returns.
To summarise, the S&P 500’s significance extends beyond being a gauge for the US economy. It acts as a benchmark to compare individual investment performance, shapes investment strategies and offers historical market data for investment and behavioural analysis.
Top 10 S&P 500 Constituents and Sectors
Like the FTSE 100 Index in the UK, the companies in the S&P 500 are reviewed every quarter (in March, June, September and December). At these quarterly reviews, company weightings are updated, new companies enter the index, and some are removed.
As at 31st October 2024, the top ten S&P 500 companies by index weighting are as follows.
| Company | Ticker Symbol | Sector |
| Apple | AAPL | Information Technology |
| Nvidia | NVDA | Information Technology |
| Microsoft | MSFT | Information Technology |
| Amazon | AMZN | Consumer Discretionary |
| Meta Platforms | META | Communication Services |
| Alphabet Class A | GOOGL | Communication Services |
| Alphabet Class C | GOOG | Communication Services |
| Berkshire Hathaway B | BRK.B | Financials |
| Broadcom | AVGO | Information Technology |
| Tesla | TSLA | Consumer Discretionary |
You may have noticed that as a car company, Tesla is in the consumer discretionary sector. This may seem slightly out of place, but there is an explanation.
The S&P 500 sectors are based on the GICS (Global Industry Classification Standard). It’s a standardised framework that helps investors and other finance professionals group and compare various companies. Click here for a comprehensive breakdown.
Now to the sectors.
Since the index is split into 11 sectors, we’ve included the 11th sector in the table below instead of omitting it due to the title of this section.
Therefore, as at 31st October 2024, the eleven S&P 500 sectors by index weighting include the following.
| S&P 500 Sector Breakdown | Index Weighting (%) |
| Information Technology | 32% |
| Financials | 13% |
| Health Care | 11% |
| Consumer Discretionary | 10% |
| Communication Services | 9% |
| Industrials | 9% |
| Consumer Staples | 6% |
| Energy | 3% |
| Utilities | 3% |
| Real Estate | 2% |
| Materials | 2% |
These are the 11 sectors that the GICS splits the US economy into. These sectors are then divided into industry groups, industry groups into industries and industries into sub-industries.
To summarise, information technology companies and the information technology sector are responsible for a large percentage of the S&P 500’s value. Any significant price changes will have a noticeable impact on the index.
Summary
In summary, the S&P 500 stands as a cornerstone of financial markets, reflecting the performance and dynamics of the largest companies in the U.S. economy.
Understanding what the S&P 500 represents, how its value and weightings are calculated, and the significance of its top companies and sectors, investors gain insights into economic trends, sector strength, and market sentiment.
The index’s composition also provides a comprehensive view of corporate America and a reliable barometer for economic health.
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