How is this any different than Microsoft? I suspect all of the big four use AD and Windows in their enterprise yet that isn’t a dealbreaker for auditing MS’ financials.

The software that most accountants use is leaning into AI as hard as it can and unlike coders, accountants are being sold the benefits but can’t directly see the shortcomings and don’t have the programming know how to engage with the technical nuance.

Like many other sectors quality is gradually turning to slops as people “let the AI do it”.

These companies are allowed to go public and anyone can buy their shares.

Since the start, the S&P 500 has had a simple and consistent profitability screen. Your company must be GAAP profitable in the past quarter, as well as for your past four quarters when summed up.

The S&P 500 committee isn’t targeting these companies. They are simply choosing to keep the rules they’ve had in the beginning. And when these companies can deliver one year of profitability, like every single company added to the S&P 500 since inception, they too can join the index.

Refusing to change longstanding rules that make sense (remember: companies are supposed to be profitable!!) isn’t unfair.

they aren't being specially punished. they are being made to follow the rules that quickly to every other company that IPOs. These rules aren't arbitrary. They exist because without them, retirement accounts would be vulnerable to companies doing all sorts of nonsense to manipulate the indexes.

How do you know they are successful? The normal way we judge that in companies is with several quarters of public financial filings, independently audited and following GAAP standards.

The headline should actually say “S&P 500 index maintains existing rules for inclusion” They are not actively rejecting any of the three companies, any of them can join the S&P 500 once they meet the inclusion rules, but none of the three companies meet the criteria at the moment.

It’s not active rejection, they simply don’t meet the criteria to join the S&P 500 yet. The inclusion rules don’t completely prevent garbage stocks from being added, but it helps keep out the most egregious frauds, but even then an Enron will happen every so often.

More like its a regulated space and it makes basic sense to have regulations

if you can't maintain success for 4 quarters then you weren't really successful.

“Innocent until proven guilty” is for the courts. It doesn’t apply elsewhere.

If somebody comes up to you on the street and claims to be the wallet inspector, should I cry “guilty until proven innocent!” when you refuse to hand yours over?

These rules ensure some stability before a company gets included in an index. That’s all. No company has a right to be included just because of their valuation at some moment.

Let's say Alphabet shifts further to ~become a 100% AI company in the same way that Anthropic and OpenAI are. Should they be removed from the index? If not, why not?

What you're describing is closer to the DJIA.

It's not just about returns, it's also about risk. The role of a passive index fund is to be a passive index fund. If the s&p starts chasing returns, that will reduce its utility to the market. You get higher returns by being compensated for risks that passive investors/retirement funds don't want to take. And active investors use the S&P and similar indexes for the specific risks and asset class exposures they provide. You might think the economy is going to do poorly which would be good news for some company that's anti-correlated with the economy but you need to hedge that bet for if the economy does well, so in addition to buying shares of whatever that company is you buy into some market reflectiong mix of stocks bonds etc. The role of that hedge is to have a counterbalancing asset that moves opposite your primary bet to reduce volatility, and the role of the s&p 500 is to broadly reflect the american large cap publicly traded stock component of the market. If the S&P 500 begins behaving unpredictability to chase returns as an index then buying funds that track that index is no longer doing what you need it to do. S&P index loses utility, active investors just use some other index, but passive investors with 401ks locked in to tracking the s&p are suddenly forced to buy whatever bet the index creator is making en masse driving the stock price up. That's not a good outcome for anyone except the company muscling their way in and anyone that was somehow rewarded by that addition

What do you mean "better profitability criteria"? I don't want an index to exclude companies on the basis of profitability. I want it to hold the market.

(I also don't want them to create special exceptions. The S&P 500 has pre-existing inclusion criteria, and I'm glad they're sticking to their rules.)

> Ultimately it's all about market returns. If other indexes add it and outperform then eventually money will shift to those funds that do better.

That's like saying that if Nvidia performs way better than an index fund, then the index fund will shift to consist only of Nvidia.

In any given year, there are plenty of index funds that outperform the S&P 500. They don't freak out over it.

S&P 500 is volatile over 5 years - I'd argue even over 10 years (see the charts at https://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-i...). The whole point of investing in it is for much longer windows.

So yeah, perhaps after 10 years they'll change once they'll see other index funds doing better, and have data to back up that in the long term, early inclusion didn't hurt.

You’re assuming their success is a done deal. But there is a large amount of risk in these companies.

Any individual can buy as much as they want.

> money will shift to those funds that do better

I'm not disagreeing that people invest this way, but I'd like to point out that past performance does not imply future performance, and that investors should consider factors other than just past returns.

I think it will be longer than 12 months, if ever.

> To join the S&P 500, a company must demonstrate positive GAAP net income in both its most recent quarter and the sum of the trailing four consecutive quarters

I don't think they ever got profitable for 4 consecutive quarters, if you count xAi.

Anyway, if other indexes add it, and it fails spectacularly, money will shift to those funds that do better.

After 12 months the market will have sorted it out. They can’t fake it with investment banker tricks for that long.

More than likely none of these AI companies will exist 12 months from now. Their carcasses will be devoured by entities with enough money to buy up the scraps after the bubble pops and the market implodes.

Neither SpaceX, OpenAI or Anthropic have a future. What's a shame is that had Elon not merged SpaceX with xAI it might've actually had a future - but he had to go and ruin it.

What an idiot.

Yeah but the point is, after 12 months we’ll know the real price. Right now it’s just a ponzi.

It reads like greed and corruption to me.

Then move your savings into some other vehicle instead.

Just buy the stock or buy a mutual fund which invests in IT, AI, Tech what have you. Sooner or later they will probably also be included in the general index funds.

Yes. Plenty is correct. Fidelity let's you buy SpaceX at IPO with only $2K in the bank.

And there are other reasons to be cautious. Many passive funds don't license the SP500 and instead mirror it with their own synthetic index. They are not bound to respect this decision.

Plenty of active funds also give you roughly market returns, and it's not very difficult to do the same if you're investing for yourself. The important differentiator for index funds is that they have extremely low fees and take up none of your time.

That's simply not true. The core tenet is to buy mechanically according to some rule. Many indexes are not "the whole market".

They appear to know more than you, too. They know not to change rules that have protected their investments for a chance to get into a risky bet on the ground floor.

The S&P 500 has had these requirements for decades and the approach has worked. This is really a statement that they aren’t going to change what worked so that a few billionaires can manipulate it.

Seasoning and profitability rules are why S&P does not have as steep of a drawdown or as long as a recovery as Nasdaq over the last 30 years of market performance.

The S&P recovered from Dotcom bottom in ~7 years while the Nasdaq-100 took 15 years. Likewise Nasdaq took 3.5 years and the AI hype to recover back to its COVID highs in 2024 while S&P had the same recovery in about 2 years.

This is the downside to Nasdaq having higher returns in tech bull markets.

So the indices have a very different volatility profile by design, we should be happy to have the choice rather than have them all converge to the same product.

My personal photography blogging business has a market cap of a trillion dollars too.

I have 1 trillion shares, and I sold 1 to a mate for a dollar.

Total company revenue is like 50 bucks a month and profits are nil.

Can I be in the S&P 500 too?

It’s a list of the 500 largest profitable companies. Gotta make some bottom line $$$ to be included. At least that’s how it’s worked in the past.

> I found S&P 500 Equal Weight to be pretty attractive.

The rebalancing required to maintain equal weights means constantly selling your winners and buying more of your losers. That creates volatility drag. Stock returns are highly skewed: only about 4% of stocks outperform the market, and are responsible for most of its gains. By keeping your allocation to those stocks small through constant rebalancing, you are missing out on a large part of their gains. The vast majority of stocks underperform.

Maintaining the equal weighting also requires constant trading, which generally means higher fees. A market weighted fund, in contrast, naturally maintains its desired balance in response to price movements, without any trading.

Also, the equal weighting ignores the amount of outstanding float for each company. If the fact that NASDAQ has not (historically) been float-adjusted (a common anti-SpaceX talking point) gave you concern, this is even worse, due to the multiple orders of magnitude difference between the largest and smallest companies in the S&P. If enough money enters the equal-weight index, this can spark large amounts of buying in (relatively) small companies that is divorced from their economic performance.

The equal-weight index has outperformed the market-weighted index in some periods (not in recent memory), but with higher volatility (so worse risk-adjusted returns). That outperformance can mostly be explained by factor tilts implicit in the equal weighting (e.g., a higher allocation to mid-cap value stocks).

You would probably be better off with a mix of market-weighted funds explicitly designed to give you the factor tilts and risk exposure you want.

> As for SpaceX itself? I feel the numbers involved all sound a bit unbelievable to me.

If the SEC was doing it's job, there would sanctions or jail time for those numbers.

I've been doing research on this subject for an article I'm writing, and the only way things end well if the government gets involved is if we pass legislation deprivatizing AI data centers. Like the dark fiber laid during the dotcom, the compute is the valuable thing here that will remain after the speculative bubble has burst. The deal isn't bad for the AI companies, they can depreciate on a short schedule while still getting a payout for the capex, and being able to offer tech companies compute subsidies puts the people in a stronger position than if we're subsidizing them directly.

> you’d probably want to get the benefit of their performance.

What performance? None of these companies have established "performance" and they are all still burning money in a race to be the industry leader.

There is no evidence these companies can be profitable without some kind of significant hardware advance.

Many people already have x% of their portfolio allocated to a growth fund, that might include fast growing AI companies. You need to keep the risk profile consistent. If you change the rules you mess up people's strategy.

But they haven't been good performers, and don't deserve joining s&p, and that is the point, do not make exceptions just because Elon Musk or whatever delusional billionaire says so.

The market may not have ever priced in a rebalancing of the S&P 500, but the S&P 500 also has never allowed entry of companies that may never become profitable.

> The market, broadly, never priced in a rebalancing of the S&P 500

And if you had seen it what would have that pricing looked like?

Why is that relevant? The rules are in place for a reason, why does it matter what the percentage is? They're not profitable. When they prove they're worth the dollars, they can be included, per the rules.

Also, S&P500 has a current market cap of $67 trillion, 0.3% of that is some $200billion. That is essentially a wealth transfer to the rich. They don't need it.

> They weight by free float so it would been something like 0.3%. Hardly the end of the world

That's one way to look at it. At a personal level, it's a small sliver and if it were to drop, its influence on your balance isn't much. So that's true.

Another way to look at it is that with ~200 million people owning index funds, all their funds balances together, even a tiny fraction of a percent is a massive amount of money being force-fed into spacex, which is to say, mostly into Elon's pocket (since he owns vast majority of the shares).

So why is it fair to change the rules to give this massive wealth transfer to Musk, who certainly does not need the extra money?

Can I have 0.3% of your portfolio for a startup? It’s such a small percentage you won’t notice.

Me losing $500 to Musk’s clever idea is still me losing money. It isn’t like this is a normal market event.

If it is not the end of the world, cover my losses.

0.3% for SpaceX, 0.3% for Sam Altman’s OpenAI garbage, 0.3% for Anthropic, 0.3% for whatever Elon’s next scam is, and … pretty soon you are talking about big numbers.

"they only be stealing a tiny amount so not worth doing anything"

BTW, Enron was in the S&P 500 when it went bankrupt. Other fun fact is that it was replaced with NVDA.

SpaceX needs 4 profitable consecutive quarters to be included. If you have a lot of faith that they will achieve this I recommend you buy day 1 so you can ride the highs when the passive money eventually pours in.

You've used the word "inevitably". Are you sure it's inevitable? SpaceX is launching at a ridiculous valuation, has two bad businesses bolted on to one modestly successful one, and all together the revenue puts the company well behind companies with a market cap vastly smaller than what they're pricing the IPO at.

This is a ridiculous situation, a ridiculous valuation, and a very risky business (data centers in space? c'mon, be serious).

Their job, EXPLICITLY, isn't to maximize returns.

People don't buy the S&P 500 because they buy the index because it spreads risk. That they won't get maximum returns is the intended risk tradeoff they want.

That people consider the S&P 500 as a vehicle for "maximum money" is precisely why it should be considered in a bubble. And why actions like the NASDAQ's fast-track exceptions are so concerning.

The moment you start making exceptions to the rules because "gotta push the stock index higher", it's game over for the entire economy.

> ... Standard and Poor one day being worth trillions ...

S&P - https://en.wikipedia.org/wiki/S%26P_Global - is a business intel & analytics firm, not an investment firm. Their S&P 500 list just one of many datasets that they manage and sell. Cleverly trying to pick future winners and losers has little potential upside for them, and could put them into direct competition with many of their customers.

It’s because you just lived through a 10 year period of the best growth for passive, and there is a tremendous amount of marketing online for passive.

I don’t disagree with your basic idea, but not being able to articulate alternatives so that you know when they make sense is going to hurt you.

We are possibly seeing a major failure mode for passive for the first time.

On the contrary: People with a low net worth have very few opportunities to scratch and claw their way out of their holes in this global feudal system. They are the ones who need to be able to make high-risk, high-reward investments.

A conservative 10% return on a 2 million dollar investment is a very nice 200 000. A conservative 10% return on a 20 000 dollar investment is just 2000.

If you're not born rich in this world, there are but a few doors that are open to you to try to improve your station in life. Hard work will never help you out of the hole. Not even dangerous work. Nor will an education. At least with high risk investment you have a fair chance, and at worst you loose your savings and are back where you started. You're not going to lose your life or your limbs.

Feels like there’s little danger either way. How is he going to get back out of the bottle?

`--dangerously-skip-hype`

The GP is flexing the idea that he isn't from the US.

What is naive in a completely different set of ways. We really don't need more instability coming from your side.

I expect the balancers to judge and some car batteries mysteriously catching fire as a counterweight.

You've named technologies that people were heavily speculating on that did experience bubbles. A useful technology and a painful misallocation of resources is far from mutually exclusive.

One of my indices of mania. You saw similar comments for crypto, blockchain, NFT, VR.

Sadly you are absolutely correct. The quality has nosedived in the past 1-2 years. I am not sure the exact cause but one of the things I noticed is a massive uptick in users who have insane post counts with sub 1-2 year history.

Breaking the rules but it does feel very much like Facebook or Reddit where there are distinct hive minds on topics and it just becomes a pissing match between brain-dead individuals.

Mind that the host of this site has an interest in keeping the hype going on ...

I suspect this is due to fatigue. I admit I often post low quality replies under AI slop posts, simply because flagging them does nothing when they are somehow upvoted above and beyond anything human made.

This fatigue also causes a lot of readers to skip the AI threads, meaning less self-moderation of the forum through voting.

I think you pierced the hearts of Elon haters/fan boys and are getting downvoted.

Absolutely agree with your statement. Most top comments are just upvoted from the hivemind. Elon topics are always the worst because nobody even uses critical thinking and will just upvote/downvote based on the theme of Elon = Good or Bad.

> Google and Berkshire got to be the only special babies with multiple classes of stock for a few years.

Wasn't this after their entry into the index?

> EBITDA is typically used to evaluate profitability

S&P requires GAAP profits, i.e. net income. EBITDA is above that.

And scammers gonna scam.

Is revenue the only metric we care about for this? Seems like stability and p-e ratio should at least be a factor? Which you can’t get until the ipo has actually settled.

If only hackernews had /remindme like on reddit

Open AI has never made a cent of profit.

Don't be one of those cluless techbros

So the funds will have to buy within 10 days of the IPO.

But I assume at least it's based on the free-float market cap?

Of course. And maintaining public trust in the quality of their top brand ETF is a good way to make money.

In the US at least, many pension funds are not sophisticated, they're small, underfunded, and getting taken for a ride by expensive advisors who promise fantastical returns that will help dig them out of their funding ratio hole. Many would be better off using an S&P 500 index fund for their equity component instead of getting wined and dined into an illiquid, opaque private equity investment.

Telling that among OECD countries, the US is an outlier in having a much lower average funding ratio, and this despite the fantastic performance of the US stock market over the last 15 years.

What was unlikely to happen? It already happened in Nasdaq. It’s nice that it didn’t for S&P but for most investors it already did happen, so I’m not sure the ‘whatever’ attitude is warranted.

Also, since when is it appropriate/intellectually OK to respond to allegations of corruption by saying ‘stop freaking out, it’s only a small amount of corruption PER PERSON’.

Hey thank you very much for your reply, it's deeply appreciated, this helped to start a rich research on the matter.

How is that incompatible?