If you had to use a single quantity to indicate the strength of the economy, what would it be? The consumer confidence index is too subjective. The unemployment rate overstates under-the-table workers and understates discouraged workers. Even though the Dow Jones Industrial Average is the best known and most quoted stock index in the world, it’s so selective as to be misleading. Comprised of only 30 stocks, the Dow is less representative of the economy as a whole than are several other indices. Paramount among those is the S&P 500, the daily de facto numerical indicator of the U.S. economy. While the S&P 500 gets second billing even in the financial media, and little recognition elsewhere, its importance is vital.

What's in a Name?

First, the etymology of the term. "S&P" is Standard and Poor’s. Henry Poor was a 19th century financial analyst who compiled an annual book that listed publicly held railroad companies. His publication merged with those of the "Standard" Statistics Bureau in 1941. And "500" is the number of stocks that comprise the index.

That’s it. The index includes 500 of the largest (not necessarily the 500 largest) companies whose stocks trade on either the NYSE or NASDAQ. Like popes and Oscar winners, the components of the S&P 500 are selected by committee. And, like the College of Cardinals and the Academy of Motion Picture Arts & Sciences, the S&P 500 committee operates within specific criteria. To qualify for the index, a company must have:

  • a market cap of $5.3 billion
  • its headquarters in the U.S.
  • the value of its market capitalization trade annually
  • at least a quarter-million of its shares trade in each of the previous six months
  • most of its shares in the public’s hands
  • at least half a year since its initial public offering
  • Four straight quarters of positive as-reported earnings.

Between them, the NYSE and NASDAQ list 5,900 companies (fewer than that if you restrict it to straight stocks, as opposed to master limited partnerships and other entities). But the first criterion alone reduces that number to 975, and eliminates such famous names as AOL Inc (AOL) and Tupperware Brand Corp. (TUP). Add a few more benchmarks, and it’s easy to see how the S&P can get down to 500 large-cap stocks suitable for inclusion. (For more, see: What's The Difference Between The Dow Jones Industrial Average and the S&P 500?)

Complex Math

Unlike the Dow, which you calculate by just adding up the prices of the component stocks and multiplying by a constant, the S&P 500 is more complex. Instead of adding the constituents stocks’ prices, the S&P 500 adds the companies’ float-adjusted market capitalization. “Float-adjusted” means counting only the shares available to us ordinary folk, excluding those held by management, by governments and by other companies. There are hundreds of ostensibly “publicly traded” companies that keep most of their shares in-house. (For more, see: How Is The Value of the S&P 500 Calculated?)

Shown The Door

With so many components, and such stringent criteria, the S&P 500 is dynamic. S&P Dow Jones Indices, the subsidiary of McGraw Hill Financial, Inc. (MHFI) that determines the components of the index, has little patience for slackers. United States Steel Corp. (X), one of the stalwarts of 20th century industry, had been listed on the S&P 500 since its inception. In fact, at one point U.S. Steel was the largest company in the world. Alas, it hasn’t turned a profit in years. When it fell below the $4 billion threshold in 2013, the index booted it out and made room for Martin Marietta Materials Inc. (MLM), a construction aggregate producer. Only on Wall Street does the Iron Age give way to the Stone Age. (For more, see: Where Can I Find A List of All The Stocks in the S&P 500?)

Low Turnover

But even technologically adept companies have to meet the S&P 500’s list of requirements or perish. Advanced Micro Devices Inc. (AMD) is the second-largest microprocessor producer in the world, but also fell off the index in 2013. Again, due to market cap issues. Turnover in the S&P 500 is lower than you might think — this year, only eight issues have been replaced:

Date (2014)



Aug. 14

Mallinckrodt PLC (MNK)

Rowan Companies PLC (RDC)

June 27

Martin Marietta Materials Inc. (MLM)

United States Steel Corp. (X)

June 24

Affiliated Managers Group Inc. (AMG)

Forest Laboratories

June 12

Cimarex Energy Co. (XEC)

International Game Technology (IGT)

May 1

Under Armour (UA)

Beam Inc.

March 26

Essex Property Trust (ESS)

Cliffs Natural Resources Inc. (CLF)

March 14

Keurig Green Mountain Inc. (GMCR)

WPX Energy Inc.

Jan. 24

Tractor Supply Co. (TSCO)

Life Technologies

That list excludes one instance of a company buying the company it replaced on the index, and another of a company spinning off a large chunk of itself. Forest Labs, Beam, and Life Technologies all got bought out by larger companies. The remaining ex-index members all fell victim to low capitalization. Typically, when that happens, the one company is relegated to the index that its replacement was promoted from. For instance, Rowan took Mallinckrodt’s place on the S&P MidCap 400.

Is there a survivorship bias here? Sure, but there’s also a survivorship bias in the economy at large. The remaining stocks flourish by virtue of remaining. One study even claims that over the decades, stocks deleted from the S&P 500 have ended up outperforming their replacements.

The Bottom Line

For the most part, the S&P 500 doesn’t convey information that differs drastically from comparable indices. It largely tracks (or vice versa) the more exclusive Dow, and the more inclusive Russell 2000. The S&P 500 represents a happy medium of sorts: comprehensive enough to indicate the relative strength or weakness of the larger economy, but not so exhaustive as to include too much noise with the signal. On balance, the S&P 500 is the index of indices — the bellwether adopted by analysts, policymakers, and ordinary market participants alike. (For more, see: How Can I Buy An S&P 500 Fund?)

Related Articles
  1. Economics

    Advocacy Group Seeks To Change Name Of S&P 500

    "Brokers Against Unpleasant Sociolinguistics" are campaigning to change the name of the S&P 500 Index.
  2. Mutual Funds & ETFs

    S&P 500 ETFs: Market Weight Vs. Equal Weight

    Both indexes include the same stocks, but their weightings give them very different properties.
  3. Active Trading

    S&P 500 Options On Futures: Profiting From Time-Value Decay

    Writing bull put credit spreads are not only limited in risk, but can profit from a wider range of market directions.
  4. Investing News

    Market Outlook: No Bottom Until 2017?

    These investing pros are bearish on the market in 2016. Will there be a bottom in early 2017?
  5. Economics

    Negative Interest Rate Policy (NIRP)

    A negative interest rate policy is an unconventional monetary policy tool in which nominal target interest rates are set below zero.
  6. Investing News

    Building a Case for the Bulls: 3 Opinions

    These three big names are bullish on the economy. Are there good times ahead?
  7. Fundamental Analysis

    5 Predictions for the Chinese Stock Market in 2016

    Find out why market analysts are making these five ominous predictions about the Chinese stock market in 2016, and how it may impact the entire world.
  8. Investing

    Will China Suffer a Fate Similar to That of the Soviet Union?

    Many parallels could be drawn between the former USSR and today's China, but the one similarity the CCP wants to avoid is the Soviet Union's collapse.
  9. Investing News

    How China's Economy is Now Like America's

    China's economy could take the global economy down with it; why that might be good news in the grand scheme.
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  1. How can I buy an S&P 500 fund?

    In 1976, Vanguard introduced individual investors to the first mutual fund designed to mimic the S&P 500 Index. Today ... Read Full Answer >>
  2. Where can I find the P/E ratios for the Dow and S&P 500?

    When it comes to valuing stocks, the price-to-earnings (P/E) ratio is one of the oldest and most frequently used metrics. ... Read Full Answer >>
  3. Where can I find a list of all of the stocks in the S&P 500?

    The actual list of all 500 stocks in the S&P 500 is called the Constituent List. It can be found on the official Standard ... Read Full Answer >>
  4. How is the value of the S&P 500 calculated?

    The S&P 500 is a U.S.market index that gives investors an idea of the overall movement in the U.S.equity market. The ... Read Full Answer >>
  5. What's the difference between the Dow Jones Industrial Average and the S&P 500?

    The major difference between these two indexes is that the Dow Jones Industrial Average (DJIA) includes a price-weighted ... Read Full Answer >>
  6. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
Trading Center