Musings on Markets is the personal blog of Aswath Damodaran, professor of finance at NYU Stern and widely known as the "Dean of Valuation." Running since 2008, it publishes hands-on intrinsic-value teardowns of headline companies (SpaceX, Tesla, Nvidia) using his narrative-and-numbers DCF framework, plus periodic market-wide reviews.
This analysis asks whether loss-making giants like SpaceX, OpenAI, and Anthropic should be added to the S&P 500. The author argues opponents are biased—either active fund promoters or self-appointed protectors of retail investors. For ordinary investors, index funds remain a solid choice because most active managers underperform over time. Adding these companies won't hurt the index; it makes it more representative. Worth reading because it cuts through the hype and reveals the real motives behind the debate.
Recently, three potential trillion-dollar companies—SpaceX, Anthropic, and OpenAI—have announced plans to go public, sparking debate over whether they should be included in the S&P 500. Author Aswath Damodaran is skeptical of arguments against inclusion, believing they hide biases from three groups:
This chapter centers on the debate over whether SpaceX, Anthropic, and OpenAI—three companies with the potential to become trillion-dollar firms—should be included in the S&P 500 after going public. The author, Aswath Damodaran, argues that the opposition to inclusion is driven by biases and misguided investment philosophies from three specific groups, rather than by rational analysis based on index construction principles. The chapter aims to clarify the relationship between inclusion criteria and passive investing by starting from the fundamental principles of index construction.
The author holds a clearly skeptical stance toward the arguments opposing the inclusion of these new trillion-dollar companies in the S&P 500. He believes that opponents primarily come from three groups, each with hidden motives:
1. Passive Active Investors—Frustrated by two decades of losing ground to passive investing (index funds, ETFs), they view inclusion as a risk to passive strategies and attempt to charge fees for professional managers to avoid this risk.
2. Academic Experts and Investor Protectors—Claiming to protect retail investors and retirees, they argue that including large, loss-making companies in the index is dangerous for retail investors, who may not understand their exposure and should not invest in such companies.
3. Politicians—Typically not a source of investment wisdom, they publicly accuse inclusion of rewarding "billionaire villains."
The author’s counter-intuitive judgment is that indices should not exclude these companies based on short-term market sentiment or political pressure. Instead, decisions should be made according to established construction principles (such as market capitalization, liquidity, and profitability thresholds), and inclusion does not endanger passive investing.
The author supports his view by dissecting the construction mechanism of the S&P 500:
| Construction Dimension | Specific Rules / Data |
|---|---|
| Constituent Stocks | 500 large-cap U.S. listed stocks, requiring at least one year of listing, liquidity (based on float-adjusted shares), and positive earnings over the trailing four quarters. |
| Weighting Method | Uses free-float market capitalization weighting (not equal weighting or price weighting). Meta's weight is lower than its full market cap because the Class B voting shares held by Zuckerberg are excluded from free float. Walmart's weight is also constrained because shares held by the founding family are considered non-tradable. |
| Index Calculation | Example as of June 15, 2026: S&P 500 closes at 7554.29 points. The total adjusted market cap of the 500 companies is $63,498.44 billion. The index divisor is 0.1190 (7554.29 / 63498.44). The divisor is used to convert aggregate dividends and aggregate earnings into index-level data (e.g., total dividends of $664.90 billion in 2025 × 0.1190 = index dividend of 79.12). |
| Price Updates | Real-time adjustments for publicly traded stocks; for assets not continuously traded (e.g., the Case-Shiller real estate index), extrapolation from a sample of partial trades leads to noise and lags. |
| Constituent Change Mechanism | When a high-market-cap company replaces a low-market-cap company, the index divisor must be adjusted to avoid a jump in the index level. For example, if a trillion-dollar company replaces a billion-dollar company, the divisor is recalculated. |
The author emphasizes that price weighting (like the Dow 30) has no merits, especially as it breaks down after stock splits; market-cap weighting (especially with free-float adjustment) is currently the most widely used and reasonable method.
| Company/Asset | Role/Key Data | Long/Short Direction |
|---|---|---|
| SpaceX, Anthropic, OpenAI | Potential trillion-dollar IPO candidates, triggering inclusion controversy | Author argues inclusion should be determined by rules, not biased opposition |
| Meta (META) | Class B voting shares held by Zuckerberg excluded from free float, index weight lower than actual market cap | Neutral (only illustrates weighting mechanism) |
| Walmart (WMT) | Family-controlled shares considered non-tradable, free-float weight constrained | Neutral (only illustrates weighting mechanism) |
This chapter breaks down in detail the internal mechanics of the S&P 500 index and its evolving role. The author, Aswath Damodaran, points out that the index was originally only a statistical tool for measuring market performance, but has now evolved into a benchmark for active investment performance and a vehicle for passive investing. This evolution has led to the systemic underperformance of active investing relative to passive investing, and has sparked in-depth discussion on index composition and the structural impact of passive investing.
The author's core argument is: while including trillion-dollar companies (such as SpaceX, OpenAI) in the S&P 500 will not change the index level at the time of replacement, it will fundamentally alter the future character of the index—bringing higher risk, a decline in short-term earnings, and increased long-term growth potential. In addition, the author firmly believes that active investing has failed at the collective level, and its systematic underperformance relative to the index has become an indisputable fact. Counterintuitively, the author believes that the success of passive investing stems not from investor wisdom, but from the collective failure of active managers.
This chapter supports its viewpoint with extensive data and historical comparisons:
1. Index Mechanics: Through formulas, the author demonstrates that when a company with a trillion-dollar market capitalization is added to the S&P 500, the index level remains unchanged, but the index's underlying composition (e.g., earnings, growth expectations) is permanently altered.
2. Systematic Failure of Active Management:
3. Scale of Passive Investing: From a single S&P 500 index fund in 1981, to the current state where Vanguard alone manages over 200 index funds and 100 ETFs, growth has been exponential.
Comparative Data Table (Proportion of Active Fund Managers Underperforming Corresponding Indices over the Past Decade):
| Investment Style | Underperformance Rate (Past 1 Year) | Underperformance Rate (Past 3 Years) | Underperformance Rate (Past 5 Years) | Underperformance Rate (Past 10 Years) |
|---|---|---|---|---|
| Large-Cap Growth | 82% | 87% | 91% | 95% |
| Large-Cap Value | 78% | 85% | 89% | 92% |
| Mid-Cap Blend | 75% | 80% | 84% | 88% |
| Small-Cap Growth | 79% | 83% | 87% | 90% |
1. Abandon the Illusion of Active Stock Selection Entirely: Data clearly shows that, regardless of market or investment style, the vast majority of active fund managers cannot beat passive indices over the long term. Investors should systematically reduce allocations to high-fee active funds, hedge funds, and private equity funds (whose long-term performance has converged with that of public mutual funds).
2. Embrace Passive Investment Vehicles, but Optimize: The core advantages of passive investing are low cost and high transparency. Investors should prioritize broad-based index funds or ETFs like the S&P 500, which cover over 80% of market capitalization. At the same time, passive vehicles for specific market segments (e.g., value, small-cap) can be considered to gain targeted risk exposure.
3. Beware of Structural Risks in Index Funds: The author implies that as passive index investing grows too large, it may distort market pricing (e.g., stocks being bought simply because they are index constituents, not due to value). Furthermore, a "bad money drives out good" incentive may exist between index providers and fund companies, which investors should remain vigilant about.
4. Monitor the Future Evolution of Index Composition: If the S&P 500 were to include high-growth but loss-making trillion-dollar companies (such as SpaceX) in the future, this would not cause index volatility on the replacement date, but would permanently raise the index's risk and growth expectations. Investors need to reassess whether the index funds they hold still align with their risk preferences.
This chapter explores the potential negative impact of the rise of passive investing on market efficiency, focusing on rebutting two opposing views: first, that index inclusion can permanently boost stock prices, and second, that passive investing distorts fundamental pricing by creating momentum. The author believes both concerns are exaggerated and are typically raised by active investors whose interests have been harmed.
The core judgment of author Aswath Damodaran is:
Counterintuitive judgment: The larger the scale of passive investing, the smaller the price effect of index inclusion; active investors' accusations that passive investing reduces market efficiency are both hypocritical and self-serving.
1. Index Inclusion Boost Diminishes Over Time
| Time Period | Short-term Excess Return After Inclusion | Short-term Excess Loss After Deletion | Persistence |
|---|---|---|---|
| 1995-2000 | Significantly positive | Significantly negative | Lasts for weeks or longer |
| 2010-2021 | Near zero | Near zero | Highly fleeting |
2. Tesla Case (Inclusion in December 2020)
3. Momentum vs. Fundamentals
| Company/Asset | Role and Data | Author's View |
|---|---|---|
| Tesla | Included in the S&P 500 in December 2020; underperformed the index and the replaced company AIV for months after inclusion | Serves as a typical example of the negligible index inclusion effect; the author is bearish on the notion that "inclusion pushes up stock prices" |
| Apartment Investment and Management (AIV) | The company replaced by Tesla in the S&P 500 | As a control, it outperformed Tesla (no catastrophic decline after deletion) |
| Mag Seven (Magnificent Seven) | The author uses this group to illustrate winner-take-all; most earnings growth is concentrated here, with scale effects stemming from economic structure rather than passive capital | Not a bullish or bearish stance, but to demonstrate the limitations of momentum attribution |
| SpaceX, OpenAI, Anthropic | Subject of upcoming listing discussions | The author believes that inclusion or exclusion from the S&P 500 will not alter their stock price trajectory |
This chapter challenges the mainstream opinion that opposes including loss-making large companies like SpaceX in the S&P 500 index, revealing three underlying biases: risk perception bias, distrust of retail investors, and a flawed binary classification of profitable versus unprofitable companies. Author Aswath Damodaran argues that these arguments for protecting investors are both misleading and condescending.
The report argues that including loss-making companies is not only reasonable but also essential for index construction. The author explicitly opposes blocking these companies from the index in the name of protecting retail investors, and points out that:
| Investor Type | Exposure to SpaceX Risk | Risk of Underperforming Market |
|---|---|---|
| Retail investor in S&P 500 index fund | Minimal (diversified across 500 stocks) | Low |
| Active management fund (overweight/zero position) | Concentrated or completely absent | High |