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What is the S&P 500?
The S&P 500 is one of the world’s most important stock market indices and has more than tripled in value over the last decade. But what is the S&P 500 and which companies does it contain?
The S&P 500 reached new highs in recent weeks, despite a precarious geopolitical outlook.
The index passed 7,000 points for the first time on 15 April and it has since climbed even higher, touching 7,401.5 on 8 May before closing the session at 7,398.93.
As one of the largest, most liquid equity indices in the world, S&P 500 funds make popular investments, especially for retail investors without the time or interest to carefully watch the market.
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If you’re considering where to invest and want some exposure to the US stock market, then an S&P 500 tracker is likely your first port of call (you can’t directly invest in an index, but index funds enable you to effectively replicate them within your portfolio).
But these recent heights have prompted some scepticism. Given the degree of volatility in the world plus rising oil prices threatening a global energy crisis, why is the largest stock market index at its highest-ever level?
Some think it is overexuberance. The Bank of England’s deputy governor for financial stability, Sarah Breeden, warned recently that stock markets don’t reflect the level of risk in the global economy.
Yet market research firm FactSet shows evidence to back up ‘S&P 7000’-related optimism.
Two-thirds of the way through earnings season, the index is reporting its highest earnings growth rate since Q4 2021.
On 1 May, FactSet reported that 63% of S&P-listed companies reported actual results for Q1 and of these, 84% had reported actual EPS above estimates – the highest number to do so since Q2 2021.
Whether or not you plan to invest in the S&P 500, it’s a very important index to understand for all investors, given its key position in the global stock market.
What is the S&P 500?
The S&P 500 is an equity index that effectively acts as a barometer for the broader US stock market.
The index is made up of 500 of the largest companies in the US and represents around 80% of the total market capitalisation (market cap) of the country. That means that it is a good representation of the health of the stock market (and to an extent, the US economy, though the two are not necessarily the same thing).
Despite representing 500 companies, the index typically comprises between 503 and 505 different shares, because some companies, like Alphabet, issue multiple classes of stock that are also included in the list.
What are the S&P 500 companies?
Today, the S&P 500 comprises 503 of the largest stocks in the US.
Notable names include the ‘Magnificent 7’ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla), alongside stocks like Netflix, Mastercard, Coca-Cola, Pfizer and 490 others.
Below is a table of the top 10 largest stock weightings in the S&P 500:
The S&P 500 is not the only significant stock market index in the US, though it is the largest and most representative of the market as a whole.
Other major indices include the Dow Jones Industrial Average, which tracks 30 prominent US stocks and the Nasdaq-100, which tracks 100 of the largest non-financial companies listed on the Nasdaq stock exchange. The Nasdaq 100 tends to be associated with tech names.
Who decides which companies are in the S&P 500?
The precursor to the S&P 500 was created in 1923 when the Standard Statistics Company compiled a stock index with Poor’s Publishing that consisted of 233 US stocks. It later created an index of 90 stocks before the two companies merged in 1941 to form Standard & Poor's – the ‘S’ and the ‘P’ of S&P.
In 1957, the S&P 500 we know today was formed, although the stocks comprising it now are very different. S&P Dow Jones Indices has managed the S&P 500 since 2011.
In order to become a member of the S&P 500, a firm must meet various criteria based on market cap, liquidity, free float, time since IPO and profitability.
If these requirements are met, S&P Dow Jones Indices will decide whether said firm can join the index. A firm does not automatically become a constituent of the S&P 500 when it meets all the requirements, which is why the index doesn’t always include all 500 largest companies. Software company Snowflake (XNYS:SNOW), for example, has a market cap of $41.8 billion and is listed on the New York Stock Exchange, but it is currently excluded because of its lack of profitability according to traditional accounting standards.
Every quarter, the index is rebalanced. This is a process where S&P Dow Jones Indices looks at all the constituent stocks and decides whether or not they deserve to stay in the index. This makes sure the index constantly represents the market accurately.
While the S&P 500 is rebalanced at regular intervals, it can also be rebalanced if a sudden and significant corporate event occurs such as a merger, acquisition or bankruptcy.
Some popular ETFs include the Vanguard S&P 500 ETF (LON:VUAG), the iShares Core S&P 500 UCITS ETF (LON:CSP1) or the Invesco S&P 500 UCITS ETF (LON:SPXP).
Before you choose one, it is a good idea to shop around and see which S&P 500 ETF suits you best, as they will charge different fees and be configured in different ways.
Investing in a S&P 500 ETF is a safer way to grow your cash than wildly speculating, but you could still lose money if the US stock market contracts.
Can I invest in an S&P 500 fund if I am based in the UK?
UK-based investors can access S&P 500 tracker funds, despite it being an American index. But be aware that your investments will be made in US dollars rather than pounds sterling, exposing you to potential exchange-rate risk.
In terms of flagship indices, some UK equivalents are the FTSE 100 or FTSE 250. If you are keen to invest your money in UK stocks rather than ones listed across the pond then you may want to research these indices further.
Are S&P 500 index funds safe?
Different types of investors have different priorities as well as different attitudes towards risk. Some are willing to micro-manage their investments, while others are content with a more hands-off approach.
For the latter group, investing in an S&P 500-linked index fund or ETF seems the more appropriate solution spreading the volatility risk across a higher number of names with the ease of accessing them through a single fund.
As always, it’s important to understand exactly what you’re invested in.
Victoria Hasler, head of fund research at Hargreaves Lansdown, said the advantages to holding an S&P 500 index fund are that it shouldn’t contain any nasty surprises, performance will be aligned to the expected headline numbers – subject to fees – and costs are typically minimal compared to less liquid markets.
But she pointed out some disadvantages as well: “An index fund will never outperform the benchmark by any significant margin, you will inevitably, at points, end up owning stocks that are very expensive, or you don’t like, and the concentration of the index means performance can be dominated by a few big stocks.”
Diversification is a vital factor when building any investment portfolio. Currently, investing in an S&P 500 fund means heavy exposure to technology stocks, which introduces concentration risk if market sentiment turns against that sector.
In May, the top 10 names accounted for close to 40% of the index. Nine of these, making up nearly 38% of the index, are information technology stocks.
“These figures are not necessarily good or bad, but investors should be aware that in buying an index of 500 stocks they may not be getting quite as much diversification as they first thought,” Hasler added.
However, if you diversified and held 30% in the S&P 500, 40% in gold, and 30% in government bonds, then a downturn in tech would only directly affect the money in your S&P 500 ETF. Meanwhile, your gold and bonds would probably be far less affected, therefore mitigating the damage to your money.
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Daniel is a financial journalist at MoneyWeek, writing about personal finance, economics, property, politics, and investing.
He covers savings, political news and enjoys translating economic data into simple English, and explaining what it means for your wallet.
Daniel joined MoneyWeek in January 2025 and previously worked at The Economist in their Audience team. He read history at Emmanuel College, Cambridge and edited Cambridge's student newspaper, Varsity.
In his free time, he likes reading, walking around Hampstead Heath, and cooking overambitious meals.
