Maybe it's time to rethink how the S&P 500 is constructed 🤯

Plus a charted review of the macro crosscurrents 🔀

Jun 14, 2026

Some people were surprised to hear that I’m open to updating S&P Dow Jones Indices’ requirements for which companies are included in the S&P 500.

I think their methodology is very good. But I wouldn’t say it’s perfect. Most would agree that it has its weaknesses. And admittedly, I couldn’t tell you what perfect would look like.

I do know that rules are rarely perfect the first time they’re written. The U.S. Constitution has been amended 27 times. The NBA regularly updates the rules of the game. Even casual fans of soccer have noticed that FIFA has introduced new rules for World Cup play. And of course, S&P Dow Jones makes changes to inclusion requirements for its many indexes.

Ultimately, I think that if we discover and agree on ways an index can better deliver on its aims, we should make changes.

Changes in methodology don’t have to mean big changes to performance ⚖️

As I mentioned in Wednesday’s newsletter, I’m not crazy about S&P Dow Jones’ requirement for positive GAAP net income for “the most recent quarter, and the sum of the most recent four consecutive quarters.“ It’s a backward-looking metric, and I’m in the camp that believes stocks trade largely on expectations for future profits.

SpaceX is an example of a massive, unprofitable company that’s largely trading on expectations for future profitability. Sure, there’s no guarantee that it ever earns the kind of profits that justify the current valuation. Nevertheless, it’s a bit odd to me to exclude such a large company from indices intended to reflect the broad market. (To be clear, this doesn’t mean I think SpaceX or any other large company should be added right away. More on that here.)

That said, I also don’t know if there’s an elegant solution to this issue that doesn’t lead to people freaking out.

I did stumble across some interesting alternatives while doing some academic reading and earning continuing education credits.

Rob Arnott and Lillian Wu recently published a paper for the CFA Institute Research & Policy Center. Titled “The Active Side of Indexing,” the paper argues that despite being labeled a passive index, the S&P 500’s design makes it more of an active momentum-driven, “buy high, sell low” strategy with hidden costs that cause performance to drag. It’s a great read.

Among other things, they point out how the index doesn’t necessarily include the 500 largest publicly traded U.S. companies.

“On average between 1991 and 2022, the index overlaps with only about 380 of the 500 largest companies in terms of market cap at any point in time,” they noted. “This means that 120 of the true top 500 market-cap names are excluded, and a similar number of smaller-cap firms take their place. This discrepancy is not a trivial rounding error.”

In their work, the authors explored several alternative methodologies for index construction, including simple market cap and five-year average market cap inclusion requirements. Both get around the profitability problem and other subjective judgments made by the folks at S&P Dow Jones Indices.

They tested what past performance would’ve looked like under these alternative approaches. Interestingly, the results weren’t too dissimilar from the S&P 500’s performance. In fact, the returns were slightly better.

Arnott and Wu’s paper has much more, and it left me with a lot to think about. You can read it here.

I found the results of their alternative index study eye-opening. The findings suggest it’s possible to make significant changes to index inclusion methodology without totally altering the performance, which may make implementing such changes more palatable for investors.

Again, I don’t know what the ultimate answer is.

Maybe they keep the S&P 500 as is, but expand alternative, similar offerings that address concerns investors have regarding inclusion requirements.

Whatever happens, this debate is sure to intensify, especially as a growing number of mega-cap companies hit the market while being excluded from what are supposed to be broad market indices.

Related from TKer:

Review of the macro crosscurrents 🔀

📈The stock market climbed last week, with the S&P 500 gaining 0.6% to end at 7,431.46. The index is now down 2.3% from its June 2 closing high of 7,609.78 and up 8.6% year-to-date. For market insights, check out the Stock Market tab at TKer. »

There were several notable data points and macroeconomic developments since our last review:

🎈Consumer price inflation rises. The Consumer Price Index (CPI) jumped 4.2% year-over-year in May, up from 3.8% the month prior, as energy prices surged. Adjusted for food and energy prices, core CPI was up 2.9%.

On a month-over-month basis, CPI jumped 0.6%, driven by a 3.9% increase in energy prices. Core CPI rose 0.2%. If you annualize the three-month and six-month figures — a reflection of the short-term trend in prices — core CPI climbed 3.2% and 3.1%, respectively.

While inflation rates have cooled over the years, they remain above the Fed’s 2% target rate.

For more discussion on inflation and monetary policy, read: The other side of the Fed’s inflation ‘mistake’ 🧐 and ‘When will the Fed cut rates?’ is not the right question for investors right now ✂️

🎈 Inflation expectations cool marginally. From the New York Fed’s May Survey of Consumer Expectations: “Median inflation expectations decreased by 0.1 percentage point to 3.5% at the one-year-ahead horizon and were unchanged at 3.1% and 3.0% at the three-year and five-year-ahead horizons in May.”

👎Labor market sentiment worsens. From the New York Fed: “The mean perceived probability of losing one’s job in the next 12 months increased by 0.5 percentage point to 15.1%, above the series’ 12-month trailing average of 14.4%. The mean probability of leaving one’s job voluntarily, or the expected quit rate, in the next 12 months increased by 2.6 percentage points to 20.8%, its highest level since February 2023. The increase was broad-based across age, education, and income groups.”

More: “The mean perceived probability of finding a job if one’s current job was lost decreased by 2.3 percentage points to 43.7%, remaining below its 12-month trailing average of 46.8% and marking the lowest reading since December 2025.“

For more on the outlook for jobs, read: The next couple of years for the job market could be tough 🫤

👎 Consumer vibes remain in the dump, but improve slightly. From the University of Michigan’s May Surveys of Consumers: “This month, consumer sentiment ticked up about four index points, or 9%, with consumers experiencing some relief due to the early-month easing in gasoline prices. This measured improvement in sentiment was widespread, seen across age, education, and political party. Lower-income consumers exhibited a particularly strong sentiment increase, consistent with the fact that gasoline comprises a larger share of their budgets. Overall, assessments and expectations of personal finances and business conditions all rose this month. Even with June’s early gains, however, views of the economy are still relatively dour. Sentiment is currently 13% below January 2026 and 19% below a year ago, as consumers remain focused on kitchen table issues. They feel burdened by the recent escalation in inflation and worry that higher inflation could remain stubborn going forward, particularly in the short run.”

According to the survey, consumers are far more concerned about inflation than they are about jobs.

For more on consumer sentiment, read: What consumers do > what consumers say 🙊

🤔 Recent private job growth is stable. According to payroll processor ADP, private U.S. employers added 29,000 jobs in the four weeks ending May 23.

For more on the labor market, read: Things are looking up in the labor market👍

💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 229,000 during the week ending June 6, up from 225,000 the week prior. This metric remains at levels historically associated with economic growth.

Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.795 million during the week ending May 30.

For more on the labor market, read: Why mass tech layoffs have little effect on total employment 💾

🛍️ Retail sales may have declined last month. According to the Chicago Fed’s Advance Retail Trade Summary, sales fell 0.3% in May. Adjusted for inflation, sales were down 1.3% from the prior period.

💳 Card spending data is holding up. From BofA: “Consumer spending momentum is remarkably robust, with total card spending rising 5.1% year-over-year (YoY) in May - the strongest growth in nearly four years, according to Bank of America internal card data. Moreover, growth isn’t just gasoline-driven — underlying spending remains firm across both goods and services.“

Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️

⛽️ Gas and diesel prices fall but remain elevated. From AAA: “The national average for a gallon of regular has been falling for three straight weeks, delivering some relief to drivers during the busy summer travel season. Since May 21, the national average has dropped from $4.56 to $4.12 thanks to crude oil prices remaining below $100 per barrel. Gas prices typically peak around this time of year, but uncertainty surrounding the Strait of Hormuz makes this year more unpredictable. Pump prices remain at four-year highs, but the national average is currently far from the record set on June 11, 2022, of $5 per gallon.“

Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.

For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊

🏚 Home sales rose. Sales of previously owned homes increased 3.2% in May to an annualized rate of 4.17 million units. From NAR chief economist Lawrence Yun: “Improving affordability is helping drive this momentum. Even with mortgage rates ticking up compared to earlier in the year, they remain lower than a year ago and are essentially at the long-term historical average. Income gains are also outpacing home price growth by a small margin in most parts of the country.”

Prices for previously owned homes rose from last month and year-ago levels. From the NAR: “The median existing-home sales price for all housing types in May was $429,300, up 1.3% from one year ago ($423,700) – the 35th consecutive month of year-over-year price increases.”

From Yun: “The new record-high May home price reflects solid fundamentals for homeowners and ongoing supply constraints. Only 1% of all home sales involved a foreclosure or an underwater situation in which the sale price could not cover the outstanding mortgage balance. This shows that homeowners are on solid financial footing.”

🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.52%, up from 6.48% last week. From Freddie Mac: “Stronger employment momentum has helped existing home sales reach a five-month high. Importantly, homebuyers are looking past the short-term rate fluctuations and actively entering the market, signaling renewed confidence in homeownership opportunities.“

As of Q1, there were 147.6 million housing units in the U.S., of which 86.0 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

👎 Small business optimism ticks higher, remains cool. The NFIB’s Small Business Optimism Index declined to 95.3 in May from 95.9 in April. From the NFIB: “Despite the enthusiasm around AI, the overall picture is divided. More small business owners are struggling with significant and unpredictable hikes in fuel prices, which are more challenging for small businesses to pass on to their customers compared to their larger corporate competitors.”

Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.

For more on this, read: What businesses do > what businesses say 🙊 and 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃

📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.3% rate in Q2.

For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻‍♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️

Putting it all together 📋

Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been trending higher.

Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation, while positive, is not as hot as it used to be. It has become harder to argue that growth is destiny.

Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.

Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.

For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »

Key insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

(Source: S&P Dow Jones indices via TKer)

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays ⏳

Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐

…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.

Warren Buffett’s ‘fourth law of motion’ 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.

Proof that ‘past performance is no guarantee of future results’ 📊

Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.

It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.

📈 TKer by Sam Ro

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