Tesla prominently raised the promise to shake up the automotive and clean-energy industries, and will deliver an equally exclusionary blow to the S&P 500 when it starts trading on the benchmark index from Monday.
This is the largest and new entry in the index by market cap, which stood at $ 658.79 billion at the end of Friday’s trading. The stock closed at $ 695, but fell to $ 665 in pre-market trading on Monday, a drop of more than 4 percent.
By all accounts, Tesla’s stock has seen a meteoric rise, which has skyrocketed nearly 700 percent year-over-year – for co-founder and CEO Elon Musk (who owns about one-fifth of Tesla’s shares). Increased to millions. Americans who now own the company’s stock in their retirement portfolio.
The popularity of funds covering passive investment and all components of key market indices has risen in recent years, so the news that Tesla will join S&P further boosted its stock even more as traders raised institutional investors Bet on huge demand.
Market professionals say that absorbing such a large company into a major index can make the market – not to mention Tesla – look choppy in the short term.
“This has never been done before for a company of this size, which further adds to the uncertainty,” said David Yepz, portfolio manager at Essential Wealth Advisors. “We are watching this rally, but we can pull a little bit,” he said.
Institutional investors will have to buy Tesla stock for about $ 80 billion to rebalance their index funds, analysts estimate. “We’re feeling the sales pressure in other 499 names, buying a lot at Tesla,” said CFRA senior research analyst Garrett Nelson. “This is historically setting the stage for extreme instability.”
Like the tech-heavy NASDAQ, S&P is weighted by market cap, meaning that the performance of its largest constituent companies can have a disproportionately large impact on the entire index. Analysts point to these mechanics as the primary explanations for the S&P’s spectacular performance during a year when millions of American households and small businesses are facing intense economic hardship.
In July, Tesla announced profit for the fourth consecutive quarter, which analysts saw as the last major box the company needed to check for S&P 500 eligibility. (Its stock had previously been trading on the NASDAQ since going public a decade ago.) Analysts say Tesla’s five-for-one share split earlier this year was another potential catalyst that has driven retail investors It had raised its share price by increasing demand.
Some analysts believe Tesla has been included as a bellwester in the S&P 500, looking towards the future mobilized by clean energy-fueled electric and autonomous vehicles.
“We think there has been an increase in clean fuels and miscellaneous fuels in general for the transportation industry,” said Oppenheimer managing director and senior equity analyst Colin Rusch.
Donald Trump’s defeat of Joe Biden in the presidential election is good news for Tesla in that it increases the possibility of a more aggressive push to adopt electric and hybrid vehicles.
“There is no question that the election was a good thing for the electric vehicle market,” Nelson said. “The level of subsidy for the electric vehicle industry is going to increase dramatically under Biden,” he said.
Nelson said he expects alternatives to gasoline-powered vehicles and incentives for government investment in electric-vehicle infrastructure, even if a pair of runoff elections in Georgia next month yield a split Congress.
But some analysts see the euphoria of dot-com-bubble exubers in Tesla’s stratospheric stock valuations. “A lot has been turned upside down due to expectations,” said GLJ Research founder and CEO Gordon Johnson.
Tesla’s inclusion in a benchmark index, bets on increased ownership by large institutional investors, would open the company – and its notorious business CEO – to a more rigorous examination of its operations.
“When you join a large index like S&P, the investigation grows. People ask, ‘What do I have?’ Johnson said. “People are going to look beyond Elon Musk’s claims … You have to look at the fundamentals of this business, and I think Tesla might have some problems.”