How S&P 500’s Dominance Transformed American Investing, Making a Few Tech Giants the Cornerstone of Millions’ Retirement Plans

Every month, from 1989 to 2019, David Blitzer, a member and later chair of the S&P 500 committee, convened in a Manhattan conference room to discuss and decide upon the 500 most significant publicly traded companies in the United States. This prestigious list, known as the S&P 500, serves as an equivalent to the Billboard Hot 100 for the stock market, with companies like Boeing aiming to maintain their presence on it.

The S&P 500 is a widely recognized and frequently cited index, often appearing in newspapers and television broadcasts, and forming the basis for numerous retirement investment plans. Interestingly, S&P Global, the company responsible for creating and updating the S&P 500, also appears on this coveted list.

The lucrativeness of the S&P 500 stems primarily from its indexing business, which generates hundreds of millions in annual revenue. While S&P Global has other major ventures, such as bond rating services, its indexing division stands out for its profitability. The question then arises: how can a seemingly straightforward list of stocks generate such substantial returns, and why do competitors fail to erode these profits?

To answer this question, it is essential to understand the infrastructure behind the S&P 500’s popularity among American investors. It also reveals how millions of individuals have inadvertently placed their life savings on a handful of tech giants and the massive investments they’ve made in artificial intelligence.

The S&P 500 is a stock market index designed to function as a barometer, providing insights into the overall health of the U.S. stock market. The index’s history can be traced back to 1896 when Charles Dow and Edward Jones created the Dow Jones index by averaging the share prices of 12 large public companies. This index later expanded to include 30 major stocks and served as a tool for informing newspaper columns and boosting sales for The Wall Street Journal.

In 1957, S&P introduced its iconic list of 500 stocks, marking a significant advancement in technology at the time. Tracking and updating this extensive index required substantial resources and computing power, especially considering that S&P updated the index hourly rather than just once per day. Today, it is updated almost continually, offering real-time data.

Unlike the Dow Jones Industrial Average, which employs a price-weighted approach, the S&P 500 uses a market capitalization weighting system. This method takes into account both the size of each company and the number of outstanding shares. As a result, if Netflix stock increases by 1% while Apple decreases by 1%, the S&P 500 will experience a slight decline due to the larger overall investment in Apple compared to Netflix.

The S&P 500 is generally considered superior to the Dow Jones Industrial Average for its broad representation of the U.S. stock market. However, concerns have been raised in recent years regarding the increasing dominance of seven tech companies—Alphabet, Amazon, Meta, Nvidia, Tesla, Microsoft, and Apple—which together account for over 30% of the S&P 500. This concentration has led some economists and financial experts to worry that the S&P 500 no longer offers a well-diversified investment opportunity, focusing instead on the continued success of these tech giants and AI startups.

Despite these concerns, the S&P 500 remains a powerful symbol of the U.S. stock market and continues to influence countless retirement plans and investment strategies. The index’s enduring popularity can be attributed to several factors, including its robust methodology, the committee that oversees it, and the mystique surrounding potential changes in the list.

In 2024, S&P Global earned $1.6 billion in revenue from its indexing business, with over 90% of this income coming from firms using the S&P name to manage investments totaling $16.6 trillion. The majority of these assets were invested in SPY, Vanguard’s S&P 500 index fund and similar investments.

As a senior analyst at Mizuho Securities USA, Sean Kennedy closely follows seven companies to advise clients on buying, holding, or selling their stock. S&P Global is one of the firms he closely monitors. When asked about potential challenges to S&P’s indexing business, Kennedy responded that its competitive advantage—or “moat”—is nearly impenetrable. Customers primarily inquire about other aspects of S&P Global’s operations rather than its indexes, demonstrating the strength of the company’s position in the market.

According to Kennedy and Blitzer, the S&P 500’s moat consists of three primary factors:

1. The S&P 500 has competitors, such as the London Stock Exchange Group and MSCI, but these indices are generally seen as complementary rather than competitive alternatives for investors.
2. From the perspective of S&P’s customers, there is no viable alternative to switching from the S&P 500.
3. The committee that oversees the S&P 500 adds a layer of exclusivity and prestige to the index, as changes are closely followed within business and finance circles, with even those within the S&P office unsure of upcoming decisions.

Since Blitzer’s retirement in 2019, an anonymous committee now determines the 500 stocks that make up the S&P 500, aiming to maintain its reputation for accuracy and transparency while managing criticisms regarding its representation of the broader stock market. Regardless of these concerns, the S&P 500 remains a crucial tool for tracking the U.S. stock market and the investment decisions made within it.

The ongoing success of the S&P 500 reflects the growing reliance on a few tech giants for economic growth and innovation, particularly in areas such as artificial intelligence and data centers. As we move forward into an increasingly interconnected world, the role and influence of these companies are likely to continue shaping our global economy.