How Will The Addition Of Tesla Affect The S&P 500’s Fundamentals?

The S&P 500 Composite Index (SPX) will add Tesla Inc. (TSLA) on Dec. 21. The electric vehicle (EV) maker’s addition will be accompanied by the removal of Apartment Investment and Management Co (AIV), which is part of the Residential REITs sub-industry. Once added, Tesla will become one of the largest holdings in the S&P 500. We look at how these changes will affect expectations for the S&P 500.

Exhibit 1: Tesla (TSLA) vs. S&P 500 (SPX) vs. Russell 1000 (RUI) Year-to-Date (YTD) total returns

(Click on image to enlarge)

Source: Eikon from Refinitiv

Despite the COVID-19 pandemic, as of the Dec. 16, 2020 close, the S&P 500’s YTD total return stands at 14.6%, while the Russell 1000, which counts Tesla as one of its constituents, has a YTD total return of 17.1%. At $622.77 per share, Tesla boasts a whopping 644.4% YTD total return. This positions Tesla to have the highest YTD total return within the S&P 500, bumping ETSY Inc (ETSY) (311.6%) into second. These gains have brought Tesla’s market cap to $590 billion and will result in it being the sixth-largest holding within the S&P 500, accounting for roughly 1.5% of the index.

While Tesla’s weight is expected to be roughly 1.5% in the S&P 500, its revenue and earnings are far less substantial. Tesla will account for 12% of the consumer discretionary sector and 78% of the automobile industry. However, Tesla’s revenue is expected to account only for 0.3% of the S&P 500’s 2021 revenue, 2.0% of the consumer discretionary sector’s and 12.3% of the automobile industry’s. The EV maker’s 2021 EPS is expected to account for 0.2% of the S&P 500, 2.6% of the consumer discretionary sector, and 20.2% of the automobiles industry.

Exhibit 2: Bottom-Up EPS and 2021 P/E for S&P 500 with Current Constituents vs. Tesla Inclusion

(Click on image to enlarge)

Source: I/B/E/S data from Refinitiv

Note: EPS represents the earnings per share contribution to the S&P 500 index.

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