The S&P 500 index is one of the most closely watched indices in the world, viewed by many investors as the best performance indicator for US large-cap stocks.
It represents the share price performance of the largest public-listed companies in the US, though in technical terms its constituents are not necessarily the largest 500 at any point in time.
The index accounts for around 80% of the market cap of the US equity market.
What is S&P index?
S&P, formerly known as Standard Statistics Bureau, launched its first equity index in 1923. At first, the index was calculated on a weekly basis, and was composed of 233 US firms. Three years later, Standard Statistics introduced daily pricing, with an index comprised of 90 companies.
The name Standard & Poor's (S&P) came about in 1941 through the merger of Standard Statistics with Poor´s Publishing. In 1957, S&P´s daily index of 90 companies was expanded to 500, marking the inception of the all-important S&P 500 index. At this point, S&P´s weekly index was discontinued.
Today, there are thousands of S&P branded indices, many of which track the share price performance of overseas stocks.
Nevertheless, the S&P 500 remains the most widely followed index of all, as the preferred gauge for large-cap stocks listed in the world´s biggest economy.
In 2012, S&P Global, CME Group and News Corp formed a joint venture known as S&P Dow Jones Indices. While the S&P branded indices, including the S&P 500 itself, are now owned by S&P Dow Jones Indices, S&P Global is the majority owner of the combined entity.
Other well-known S&P indices include the S&P MidCap 400, the S&P SmallCap 600, and the S&P Composite 1500. This latter incorporates all the stocks in the S&P 500, 400 and 600.
During its first decade, the S&P 500 made reasonable gains as companies continued to benefit from the economic boom that followed World War II. However, the period from 1969 to 1981 was a difficult one for investors against sluggish growth and high inflation.
Propelled by the dot-com boom, the S&P 500 reached an all-time high of 1,527 in March 2000. The subsequent sell-off saw the index plunge to around 800 by October 2002, a peak-to-trough fall of 48%.
The index had climbed to a new peak of 1,561 by October 2007, just prior to the beginning of the global financial crisis.
A collapsing US sub-prime mortgage market and the global financial meltdown that followed saw the index hit a low of 683 by March 2009, well below the earlier trough of 2002.
Ultra-low interest rates and quantitative easing from major central banks, a policy response that was initially led by the US Federal Reserve, saw the S&P 500 rise to an all-time high of 2453 by June 19, 2017.
The S&P had thus climbed by around 260% from its low some eight years earlier.
S&P 500 volatility
The volatility of the S&P 500 is broadly in line with other high profile large-cap equity indices across the world. For instance, the S&P´s annualised volatility over five years is 9.64% compared with 10.1% for the FTSE 100.
In general, volatility tends to increase during difficult times such as recession. At present, the S&P 500 is seeing some of the lowest levels of volatility in its history, suggesting that investors currently perceive little prospect of a downturn.
A committee of experts at S&P Dow Jones periodically reviews S&P 500 companies to decide whether any firms should leave the index. Taking into consideration a number of factors, the committee also seeks to identify alternative firms that should be included in the index.
In the beginning, the committee used to target a specific number of large US companies to represent each sector of the market.
The number of sectors represented was gradually widened over time, though it wasn´t until 1977 that financial services firms were included in the index.
In 1988, when the system of having a fixed allocation to each sector was finally ended, the index was composed of 400 industrials, 20 transport companies, 40 utility companies and 40 financial services firms.
Promotions and relegations
The stocks periodically removed and added to the S&P 500 can illustrate broader trends. For instance, promotions and relegations can be indicative of evolving technology as well as changing macroeconomic conditions.
Rotation in the names that make up the index may also say as much about company specific factors and the success of individual firms´ strategies.
Tech giants dominate
Today, technology names dominate the index, with big names such as Apple, Microsoft, Facebook, Alphabet and Amazon.com all featuring within the top ten.
Meanwhile, the financial crisis of 2008/2009 left financial sectors in a weaker position in terms of index rankings.
Among the more recent entrants to the S&P 500, were semiconductor firm Advanced Micro Systems and software company Synopsys. In financials, investment firm Raymond James Financial and real estate investment trust Alexandria Real Estate Equities (ARE) were also among the new additions.
Recent exits from the top 500 have included retailer Urban Outfitters, solar panel maker First Solar and telecoms firm Frontier Communications.
S&P 500 prominence
It´s difficult to overestimate the importance of the S&P 500 index. As the most widely followed performance measure of the large-cap stocks listed in the world´s biggest economy, the index´s daily movements can have global repercussions.
The S&P 500 may provide some clues as to where the US economy is heading, with the index being sensitive to a multitude of US economic data as well as the monetary policy of the Federal Reserve.
Quite simply, this is the most important index in the world. Investors and traders from London to Tokyo are forever keeping a close watch on its daily performance.