The S&P 500 Might Welcome New Members Soon

It seems like the S&P 500 could be opening its doors to new entrants in the near future.

One candidate on the chopping block is Paramount Global. With the upcoming merger with SkyDance Media, it might face scrutiny regarding its fit within the S&P 500, especially since it’s one of the smaller players in the index.

Paramount’s market cap hovers around $8 billion, making it one of the least valuable companies in the S&P 500. Meanwhile, newcomers need a market cap of at least $22 billion. Although S&P typically avoids adding smaller companies, they also consider factors like float-adjusted market cap and liquidity in their decisions. The merger with SkyDance could impact both of these aspects for Paramount.

This merger is set to finalize on Thursday, after which the new entity will trade under “PSKY.” However, it’s worth noting that SkyDance holds about 70% of Paramount’s shares, which may shrink its float adjustment value to about $3 billion. So, there’s a decent chance S&P Global could deem it too small or lacking in liquidity for the index.

This development might create opportunities for investors eyeing Applovin and Robinhood. Earlier this year, both were thought to be prime candidates to replace Hess in the index following its acquisition by Chevron. While these companies meet S&P’s criteria for market cap and profits, they were sidelined in favor of a fintech option.

Still, in this situation, the size factor is crucial. Applovin and Robinhood’s market capitalizations are much larger, at $130 billion and $92 billion, respectively. This gives them more sway within the index compared to Paramount. Index managers may want to swap out Paramount for a similarly sized competitor, and so interactive brokers, EMCOR, and Comfort Systems USA could be in the running.

Investors often desire to see their stocks represented in the S&P 500, not just for the symbol of success but also for the potential benefits that come with it. Being part of such a respected index can bolster a company’s reputation and increase its visibility.

Moreover, inclusion in the S&P 500 tends to increase interest from passive investors. With the three largest U.S. ETFs tracking this index managing nearly $2 trillion combined, any changes in index components lead to corresponding adjustments in these funds, creating an immediate rise in demand for newly added stocks. Companies in the index typically benefit from the inflow of funds seeking to match their index weight.

Conversely, being dropped from the S&P 500 can be quite detrimental. Paramount’s shares fell about 17% recently amid uncertainty regarding its position within the index.