What does the S&P 500 measure? The S&P 500 measures the total current market value of the stocks of the 500 largest corporations listed on U.S. stock exchanges. Formally known as the Standard & Poor's 500 Index, the S&P 500 serves as a quick snapshot of the state of the stock markets.
The S&P 500 Index is the most popular measure among financial professionals, while the general public might be more familiar with the Dow Jones Industrial Average (DJIA). The Dow tracks just 30 stocks while the S&P 500 lists 500. That represents about 80% of total market capitalization.
Key Takeaways
- The S&P 500 measures the movements of the U.S. stock markets by tracking the stock prices of the 500 largest public companies.
- The S&P 500 covers most of the U.S. market, tracking roughly 80% of the total market cap.
- A downside to the index is that it is weighted toward large-cap stocks.
How the S&P 500 Index Is Calculated
The S&P 500 is highly influential as a measure of the health of the stock markets. It also is used as the basis for many index mutual funds and exchange-traded funds. These funds mirror the contents of the index, buying the same stocks in the same amounts as are represented in the index.
The S&P 500 Index is a free float-adjusted market-cap-weighted index. That means the index is continuously recalculated based on the number of shares available for trading. Because it is constructed according to market capitalization, the larger a company is, the greater the weight it will have in the index.
S&P 500 Index = Weighted Market Cap of All S&P 500 Stocks ÷ Index Divisor
Thefree-float adjusted market capitalizationsfor all constituent stocks are summed to obtain the total market capitalization of the S&P 500. It is then divided by an index divisor, which is a proprietary figure developed by S&P.
The divisor is adjusted to reflect stock splits, special dividends, and spinoffs that could affect the value of the index. The divisor ensures that these non-economic factors do not affect the index.
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The number of exchange-traded funds (ETFs) on the U.S. markets that track the index. S&P 500 ETFs have total assets under management (AUM) of about $1.12 trillion as of July 9, 2023.
S&P 500 Pitfalls
The method of calculating the S&P 500 results in an index that is weighted toward large-cap companies. The weighted average market capitalization of each component is determined by dividing the market cap of the company by the index's total market cap. Apple's weighting is determined by taking its market capitalization and dividing it by the total index market cap.
As of July 2024, Microsoft (MSFT) has the largest market cap among stocks in the index, at about $3.2 trillion. That gives it a weighting of 3.17% in the index. Walmart (WMT), with a market capitalization of about $569 billion, has only a 0.63% weighting in the S&P.
In our current tech-centric world, the methodology also gives the greatest weight to the technology giants. All eight of the in July 2024 were in the technology sector.
The index structure can mask strength or weakness in smaller companies if the movements diverge from those of larger-cap companies.
In other ways, this index structure better represents the overall economy compared to indexes where the weighting is determined by an equal share or price-weighted.
S&P 500 Benefits
The S&P 500 is considered an effective representation of the economy due to its inclusion of 500 companies, which covers most U.S. industries. In contrast, the DJIA is made up of 30 companies, leading to a more narrow reflection.
Further, the DJIA is a price-weighted index, so the largest weighted components are determined by their stock price rather than some fundamental measure.
Because of its limited representation, the movement of a single stock in the DJIA can have a greater impact than it can on the S&P 500.
How Is the Dow Jones Industrial Average Calculation Different From the S&P 500?
The Dow Jones Industrial Average is a price-weighted index, while the S&P 500 is a market-cap-weighted index. Instead of using the sums of the market caps of all component stocks in the index's numerator, the Dow takes the sum of the prices of its 30 component stocks. Thus, a one-point move in any one of the component stocks will cause the index to move by an equivalent number of points.
Like the S&P, the DJIA uses a proprietary divisor.
How Is an Equal-Weighted Index Calculated?
An equal-weighted index uses a proportional measure that gives the same importance to each stock in a portfolio or index fund regardless of company size.
This is calculated by taking an equal dollar amount of each stock and figuring out how many shares would be needed to reach that amount. For instance, an equal-weighted index where all components start at $1,000 would take 1,000 divided by the share price to get the number of shares needed.
Is the S&P 500 Price Weighted or Value Weighted?
The S&P 500 Index is neither price nor truly value-weighted. The S&P is instead a float-weighted index, meaning the market capitalizations of the companies in the index are used, but are adjusted by the number of shares available for public trading.
The Bottom Line
The S&P 500 is the most-quoted benchmark of U.S. large-cap stocks. Compared to more narrow indices like the Dow Jones, which contains just 30 stocks and is constructed using a price weighting, the S&P 500 is broader in scope and its float-adjusted market cap weighting makes it more representative of the market.
However, this is not without its drawbacks. Because of its methodology, very large stocks become more influential components of the index and tend to drown out or diminish the influence of this broad diversification.
