Analysis by José Manuel Marín Cebrián
Yes, it is happening. A paradigm shift in the composition of the indices. The transition from an index based on value and profitability (earnings-weighted) to an index based purely on expectations and market capitalisation (growth/capitalisation-weighted)
1. The Conflict: Market Capitalisation against Fundamentals
Historically, the S&P 500 has functioned as a quality filter thanks to the requirement for positive profitability (the requirement to report cumulative profits over the last four quarters). If companies such as OpenAI or SpaceX were to be included under current rules, they would have to demonstrate profitability. However, a possible relaxation of criteria would lead to:
- Risk of overvaluation: As companies with massive CAPEX and negative operating cash flows enter the index, the index’s P/E (Price-to-Earnings) ratio will be distorted. The S&P 500 would cease to be a benchmark of ‘corporate health’ and become a massive venture capital bet.
- The “Sword of Damocles”: Debt is not necessarily a bad thing, but in a high-interest-rate environment, the cost of servicing that debt can devour any projected growth. If free cash flow is consistently negative, these companies are entirely dependent on market liquidity to refinance themselves.
2. The Changing Nature of the Index
If the indices include these ‘loss-making giants’, the volatility of the S&P 500 will cease to correlate with the real economy and will instead move in step with discount rates (interest rates) and speculative sentiment.
3. Strategic Consequences
- Erosion of the safe-haven role: Many institutional investors use S&P 500 ETFs as a way of ‘buying into the US economy’. If the index becomes filled with loss-making, highly leveraged companies, the ETFs will lose their defensive character, becoming high-risk vehicles (very high beta).
- The ‘Winner-Takes-All’ trap: These companies are not seeking immediate profitability; they are seeking a technological monopoly. If they succeed, the index will rise exponentially. If they fail… the knock-on effect for the index (due to their weighting in market capitalisation) will be devastating, affecting the pension funds and savings of millions of passive investors.
My final verdict
The market is currently going through a phase where CAPEX is the new profit. Companies are burning through cash at an unprecedented rate in pursuit of “technological sovereignty” (AI, space infrastructure).
The real problem is not the entry of these companies, butinvestors’ passive exposure. If the S&P 500 becomes an ultra-speculative growth index, the retail investor seeking ‘security’ in an ETF will be unwittingly buying a call option on uncertain technologies, rather than a stake in established corporate profits.
The key question we must ask ourselves is: Is the market willing to sacrifice the stability of the S&P 500 in exchange for not missing out on the next major technological disruption? History suggests that the market prefers growth, even if it comes with a sword of Damocles hanging over its head.
As the major indices undergo transformation under unprecedented debt pressure, what will those ‘pseudo-advisers’ say—who today sell ‘IKEA’-style courses on index funds or ETFs, where they give you the kit parts to assemble your own ‘do-it-yourself’ portfolio—when the market stops rewarding blind growth and begins to take its toll for the lack of returns? The answer is simple: absolutely nothing.
Because the moment volatility goes from being the exception to the rule, their money-spinner of selling little courses will come to an end. Financial freedom is hard to teach when your business model depends on a market that only ever goes up, rather than on understanding the actual structure of the assets you recommend.
