Profit threshold not loosened! Super IPOs like SpaceX may take several years to be included in the S&P 500 index.

After a month of consultation, S&P Dow Jones Indices announced on Thursday that its index committee has decided to keep the existing rule that companies must have a positive net profit in the past year (including the most recent quarter). This means that super IPO candidates, including SpaceX, are expected to face a long road to inclusion in the S&P 500 index. According to information from a knowledgeable source, Evercore ISI research analyst predicts that SpaceX, the company engaged in rocket, satellite, and artificial intelligence businesses owned by Elon Musk, is unlikely to achieve annual net profit until 2027. If the rule remains unchanged, SpaceX may not be included in the S&P 500 index until sometime in 2028. Jay Ritter, retired professor at the University of Florida and director of the IPO Initiative, said, "These super IPOs will eventually be included in the S&P 500 index, unless their business model fails, so the question is just a matter of time." "Considering the low percentage of outstanding shares of these companies and the large amount of funds tracking the S&P 500 index, I think it's a good idea to wait until these stocks have more liquidity in the market before including them." As this decision was made, SpaceX is preparing to start trading on June 12th. The company is targeting a valuation of $1.8 trillion. If achieved, its market value will exceed the market value of all components of the S&P 500 index except for six companies, and will also surpass Tesla, Inc. (TSLA.US) under Musk. Meanwhile, SpaceX is expected to be included in multiple indices, including the Nasdaq 100 index, by the end of this month. Unlike S&P, Nasdaq has modified its rules, reducing the waiting period for inclusion in the Nasdaq 100 index from at least three months to 15 trading days. FTSE Russell has also adopted a similar approach, shortening the waiting period to 5 trading days. Balancing Act It is reported that Anthropic and OpenAI are also considering an IPO later this year. Although the market expects the valuations of both companies post-IPO to exceed $1 trillion, they may face similar obstacles to SpaceX. Whether these AI model developers can enter the S&P 500 benchmark index will depend on how they balance operations and expenditures. Anthropic is expected to generate operating profit of $559 million by the end of the quarter ending in June, but due to significant increases in expenses related to computing resources and other costs, the company does not expect to maintain profitability in the next few quarters. OpenAI is not expected to achieve profitability in the next few years. Lawrence Creatura, fund manager at PRSPCTV Capital, said in an interview, "From a business strategy perspective, running at a loss is not unreasonable." He mentioned that large companies like Amazon.com, Inc. (AMZN.US) and Uber Technologies, Inc. (UBER.US) were also included in the index years after their IPO. He said, "This means that you may not be able to enter the S&P 500 index temporarily, but look at how these companies are doing now." According to Howard Silverblatt, former senior index analyst at S&P Dow Jones Indices, the goal of the S&P 500 index is to reflect the U.S. domestic stock market. He mentioned that the profitability requirement is "the most difficult rule for S&P to defend," but also believed that the U.S. Generally Accepted Accounting Principles (GAAP) profit requirement is beneficial for the index. He pointed out that "some companies invest more in research and development than their profit levels, even if they have profitable business lines", and added that SpaceX is one of these companies. Goldman Sachs Group, Inc. and Evercore ISI research teams predict that SpaceX's capital expenditures will soar from over $20 billion last year to over $360 billion in 2030. According to sources, the Goldman Sachs Group, Inc. team expects SpaceX to reach a low point of negative $105 billion in free cash flow in 2029, and achieve over $72 billion in positive free cash flow in 2031. It is estimated that if these companies can be quickly included in the S&P 500 index, passive funds will be forced to buy approximately $14 billion of SpaceX stock, over $8 billion of OpenAI stock, and nearly $9 billion of Anthropic stock. The decision to maintain the existing rule by S&P Dow Jones Indices has left some market observers dissatisfied, while others are relieved that the rule has been retained. Michael Antonelli, market strategist at Baird, said, "To be honest, it's the premier stock market index globally, the gold standard of global stock indices." "They have clear rules on profitability and index inclusion, and now they are just sticking to those rules. Just because it's Musk and SpaceX, I don't think they would be willing to change rules that are already ingrained in the core mechanism of their product." Musk also faces the power of the "index gatekeepers" Musk has said that passive investing has gone "too far." He mocked Environmental, Social, and Governance (ESG) indices as a "scam". He has also experienced the long wait before Tesla, Inc. was included in the S&P 500 index. Now, the world's most influential benchmark index provider has given him a new reason for dissatisfaction - and in doing so, it reminds people that some of the most powerful decisions on Wall Street are actually made by index compilers. The proposal that S&P Dow Jones Indices rejected on Thursday was originally intended to provide a faster pathway for large new companies to enter the S&P 500 index. Now, the existing 12-month waiting period has been retained, meaning that SpaceX will not be eligible to enter the index until at least next year. This decision means that Musk's rocket company and other similar enterprises will not immediately gain access to one of the largest and most stable sources of demand in modern markets - the trillions of dollars tied to this globally watched stock index. This is unlikely to impact the process of SpaceX becoming what may be the largest IPO ever. However, S&P Dow Jones Indices' decision represents the first substantial institutional resistance that the Wall Street ecosystem has encountered since attempting to adapt to the wave of trillion-dollar private companies going public in recent years. This decision also exposes the core contradiction of passive investing. Index providers are supposed to be mirrors of the market, but when large companies already have significant economic importance before going public, whether to include them in the index becomes a judgment that can influence the market. Campbell Harvey, finance professor at Duke University, said, "This is a calculated gamble." "If they include it late, and investors cannot participate in the explosive growth after June 12th, that's a downside risk. Another scenario is that they are late because the stock price of SpaceX falls 50% in the next 12 months. Therefore, this is actually an active decision." Its impact goes beyond SpaceX. OpenAI and Anthropic, which are advancing towards an IPO, will also be affected. This means that some of the most important companies in the age of AI may stay outside the core benchmark indices of the global passive investment system for 12 months or even longer. This will force investors to face the dilemma that passive investing was originally supposed to avoid - buying these stocks, taking on the risk of chasing overvalued stocks; or sticking with the index, potentially missing out on the most important new public companies in the market. The question is whether index providers should adapt to this new era - where companies with disruptive impacts spend much longer time remaining private before going public. Supporters of accelerated inclusion argue that trillion-dollar companies may already be indispensable to the economy before meeting traditional index criteria. Opponents believe that profitability screening, float percentage thresholds, and observation periods exist to prevent investors from being forced to buy at the peak of market exuberance. Melissa Roberts, Managing Director of Index Rebalancing and Strategic Opportunities Research at investment bank Stephens, said, "One of the key differences between S&P and other index providers is its profitability requirement." "Methodological consistency is crucial, and what S&P has shown us this time." For those who support S&P's approach, this consistency is key. If the rules were to be rewritten because of the largest and most popular companies, the rules themselves would lose credibility. David Blitzer, who served as chairman of the S&P Dow Jones Indices committee from 1995 to 2019, said that ultimately index providers should be accountable to the investors using the index, not the companies seeking inclusion. He said, "Ultimately, I think index providers have to focus on their clients." He noted that institutions like Vanguard, State Street, and BlackRock, Inc. have developed products around the index,"If you want to hold SpaceX, just buying an index fund won't give you much exposure." Tesla, Inc. was one of the most representative cases of index inclusion in the last cycle. Despite the company's market value soaring, Tesla, Inc. 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 to date, testing whether investors can really wait for inclusion in the index. In fact, according to analysis from index rebalancing forecasting agency Intropic, even after a full year, SpaceX may not necessarily be immediately included in the S&P 500 index due to the profit requirement. Before meeting the profit threshold, it may even become the largest "non-representative" listed company in the index. Intropic analysts stated, This practice actually reflects a refreshing commitment to principle. "From past experiences of tracking new components in the S&P 500 index, they do seem willing to wait patiently." Even if not included in the S&P 500 index, Intropic estimates that if other major indices include SpaceX stock, the company may still attract around $23 billion in passive fund demand in the first three weeks after going public. Celia Fseil, Director of Stock Market Neutral Strategy at asset management company Candriam, said that the market originally expected that opening a fast track to the S&P 500 index would bring an additional $12 billion in fund inflows. She believes that the waiting period reflects S&P's consistent style. Celia Fseil said, "It is the last institution in the industry to start a consultation process for super large market value IPOs, and has always tended to retain a certain level of unpredictability." For active fund managers, S&P's decision eliminates one risk but creates another. Fund managers who are bearish on SpaceX's prospects can now avoid the stock without worrying about immediately lagging behind benchmark indices. However, if SpaceX skyrockets after going public, these fund managers may have to explain to clients why they missed out on one of the market's most important new public companies. This contradiction comes at a time when active management funds are becoming more and more like the benchmark indices they track. According to data from Bank of America Corp, the active share ratio (a measure of how different active investment portfolios are from the S&P 500 index) has dropped to its lowest level since the global financial crisis. The ultimate question of whether S&P has made the right decision may only be answered in years to come. But for investors, the more pressing question now is: what to do during this time? Celia Fseil said, "From a practical standpoint, this IPO is too big to ignore. We would not be surprised if some active fund managers with moderate flexibility attempted to participate in trading to a small extent." While the outside world is closely watching S&P's decision, the ultimate outcome is largely still in Musk's hands. If SpaceX meets the market's expectations for what could be the largest IPO ever, the company is very likely to enter the S&P 500 index sooner or later, regardless of when the timer starts. David Blitzer said, "The ball is in his court." "What matters most is the performance of this stock in the coming years, and the company's operational performance."