Exploring the S&P 500: Gateway to the U.S. market
What does it mean to “invest in the S&P 500”
Buying all 500 stocks proportionally to their weight isn’t practical for most investors. As a result, investing in the S&P 500 is typically achieved via funds like ETFs. These products allow investors to gain exposure to the index quickly and easily.
While funds are an effective way to gain exposure to the market, they can lack nuance. These types of index-tracking products are considered passive investments. Rather than a manager actively selecting weights for each stock based on expected performance, these products simply provide passive replication.
In other words, these passive products lack sophistication.
Of course, not all stocks on the S&P 500 are expected to perform the same. Some have prospects for outsized growth, while others have red flags that justify avoiding them.
For typical retail investors, deciding which stocks to buy and sell is far too demanding. Instead, many chose to purchase actively managed funds. These products are managed by teams that attempt to outperform the passive benchmark index.
The trouble is, they are often cost-prohibitive, and the vast majority don’t even beat their passive counterparts!
Over a 20-year period, 95% of large-cap actively managed funds underperformed their benchmark index! That means, 95% of investors in actively managed funds would have been better off just buying a passive index fund.
The truth is, after accounting for fees and less-than-stellar performance, most active funds simply don’t provide sufficiently strong returns.
Key milestones
- 1957: The Standard & Poor's 500 Index is officially introduced, tracking the performance of 500 large companies listed on U.S. stock exchanges.
- 1970s: The index experienced a prolonged bear market, with a notable low in 1974, partly due to the 1973–1974 stock market crash, which was linked to the oil crisis.
- August 1982: Marked the start of a significant bull market that lasted until the early 2000s, driven by declining interest rates, deregulation, and advances in technology.
- October 19, 1987 - Black Monday: The S&P 500 plummeted over 20% in a single day, part of a global stock market crash.
- March 24, 2000: The S&P 500 reached its peak during the dot-com bubble before a significant downturn triggered by the bursting of the bubble.
- 2001 - 2002: Affected by the aftermath of the dot-com bubble burst and the September 11 terrorist attacks, the index saw a significant decline.
- October 9, 2007: The S&P 500 hit a pre-financial crisis high.
- 2007 - 2008 Financial Crisis: The index saw a dramatic fall, with the lowest point reached on March 9, 2009, marking the end of the Great Recession.
- 2010 - 2020: The S&P 500 entered a long-term bull market driven by economic recovery, low interest rates, and quantitative easing policies.
- February 19, 2020: The S&P 500 peaked before plunging due to the COVID-19 pandemic.
- March 23, 2020: A low point was reached during the COVID-19 pandemic market crash.
- Post-March 2020: The S&P 500 recovered rapidly from the COVID-19 crash, reaching new highs, supported by unprecedented fiscal and monetary stimulus measures.
- 2021 - 2023: The index experienced heightened volatility due to the ongoing impacts of the COVID-19 pandemic, inflation concerns, pressure from climate initiatives, like COP28, and geopolitical tensions, like ongoing conflict in Eastern Europe and the Middle East.
Evolution of the index
Over its long history, the S&P 500 has experienced a significant evolution in its composition, calculation methodology, and role in the global markets.
Composition changes
- Sector representation: The index's composition has shifted to reflect changes in economic and business trends. Initially, it was dominated by industrial and utility companies. However, there has been a marked increase in technology and healthcare weightings in recent decades, reflecting their growing economic importance.
- Company inclusion criteria: The criteria for inclusion have evolved since its inception. These criteria include market capitalization, liquidity, domicile, public float, and length of time publicly traded, among others. The index will be periodically rebalanced to ensure it continues representing the broader market. Regardless, to be included in the index, a company must be approved by an S&P Dow Jones Indices committee.
Calculation methodology
The index uses a float-adjusted, market cap-weighted methodology. This means only shares available to public investors are considered when calculating a company’s market cap.
Technological impact
Advancements in technology have had a profound impact on the S&P 500, particularly with respect to electronic trading and real-time index tracking.
Electronic trading
- Efficiency and speed: Electronically trading systems have transformed trades that once took minutes or even hours into executions completed in fractions of a second.
- Accessibility and participation: Online brokerages and trading platforms have helped welcome many individual investors. Now, AI-backed platforms like FINQ are further democratizing markets by bringing sophisticated solutions to retail, previously reserved for higher net worth clients.
- Reduced costs: Electronic trading has substantially reduced the cost of transactions.
- Algorithmic trading: Complex algorithms can now create automated trading strategies that respond to market conditions in real-time.
Real-time index tracking
- Immediate market sentiment: The ability to track the S&P 500 index in real time allows for immediate insight into market sentiment.
- Index funds and ETFs: Technological advancements have facilitated the growth of index funds and exchange-traded funds (ETFs) that track the S&P 500. Investors can now easily invest in a basket of stocks mirroring the index's performance.
- Enhanced analysis: Rel-time tracking also enhances market analysis.
- Risk management: Real-time data helps to better assess risk, allowing for greater agility when responding to changing market conditions.
Global influence and current status
The S&P 500 plays a pivotal role in today’s global economy and significantly influences investors and markets worldwide.
- Benchmark for economic health: The S&P 500 is often viewed as a barometer of the U.S. economy, itself a significant component of the broader global economy. In fact, The Conference Board uses the S&P 500 benchmark as one of ten key components that comprise the organization’s Leading Economic Index (LEI).
- Influence on global investors: When the S&P 500 is rallying, it can boost investor confidence elsewhere in the economy, leading to positive effects on global stock markets.
- Indicator for policymakers: Central banks and governments worldwide monitor the index as part of their economic assessment. Its performance can influence the monetary and fiscal policies of the world’s major powers.
How does one successfully navigate 500 stocks?
Trying to pick the stock most likely to outperform out of a group of 500 names isn’t easy. The average retail investor becomes overwhelmed by information overload, emotions, and a lack of expertise and resources.
So, what’s the solution?
FINQ.
AI is making sweeping changes to the landscape, allowing investors with even modest capital to access sophisticated solutions, like FINQ’s FINQFULL, and AI-based continuous ranking of every stock in the S&P 500 that is updated daily.
A platform like FINQ delivering exceptional investment insights would have been impossible in the old world. With technological advancements in AI and machine learning, however, FINQ can provide retail investors with the type of resources that would have been reserved for the highest net-worth clients in the past.
FINQ: Outperforming the S&P 500
STOCKS-AI is the brain behind the powerful FINQ platform, enabling the collection and integration of data from a diverse set of data sources, like ‘crowd wisdom’ and ‘professional wisdom.’ It also collects more conventional details, like company fundamentals, think income statements, company announcements, and growth metrics, among others.
FINQFIRST
FINQFIRST is a product that provides users with a straightforward, curated list of the top 10 stocks to buy out of all 500 names that make up the S&P 500. Leveraging AI, the platform generates a list of the 10 names with the best chances of outperformance.
Best of all, the list is timely and actionable since it’s constantly maintained and updated daily.
Since inception on August 24, 2022, FINQFIRST has returned 48.85%, significantly outperforming the S&P 500’s 15.57% return during that same period.
FINQLAST
Profit doesn’t just emerge from the best-performing stocks; it can also be generated by knowing which names are most likely to fall. With FINQLAST, users can obtain a daily updated list of the bottom 10 stocks that can be sold short.
Looking at the same period above, shorting the FINQLAST recommended names returned 16.51%, compared to -15.57% for the S&P 500 Short benchmark.
FINQEDGE
For a more comprehensive market assessment, FINQ offers FINQEDGE, a list of both the top 10 stocks to buy and the worst 10 stocks to sell short.
Combined, the recommended names returned 40.82% since inception, compared to the S&P 500’s 15.57%.
Conclusion
The S&P 500 index has been a pivotal element in the history and development of modern finance, embodying the evolution of the U.S. and global economies.
Its composition has evolved, reflecting shifts in economic trends, with an increasing representation of technology and healthcare sectors. Technological advancements have greatly influenced the index, enhancing the efficiency, accessibility, and cost-effectiveness of trading, as well as swallowing real-time index tracking and the growth of index funds and ETFs.
The S&P 500 remains a crucial benchmark for the U.S. economy and a significant influence on global markers. The rise of AI-powered platforms like FINQ are now offering innovative ways to better navigate and profit from the array of stocks in the S&P 500.
The continued importance of the S&P 500 in the financial sector is underscored not only by its historical significance but also by its dynamic role in contemporary financial strategies and technologies.
