S&P 500 Adds Dicey Stocks as Market Turns Increasingly Exuberant

Core Viewpoint - The S&P 500 index is designed to reflect the stock market, and the inclusion of companies like AppLovin, despite controversies, is not an endorsement of their practices but rather a snapshot of market conditions at a given time [3][5][15]. Group 1: S&P 500 Inclusion Criteria - The S&P 500 has specific eligibility requirements based on size, liquidity, and profitability, but does not consider quality or behavior in its selection process [2]. - The index is not a stamp of approval for companies; it reflects the equities universe at a moment in time [3]. - The committee responsible for the index does not review every company annually, focusing instead on maintaining stability and sector weight consistency [12]. Group 2: AppLovin's Controversies - AppLovin faces accusations of ad fraud, illicit tracking of children, and connections to Chinese entities, leading to investigations by the SEC and state attorneys general [4]. - Despite these issues, AppLovin's stock has surged over 5,500% since the end of 2022, with a market capitalization exceeding $200 billion [5]. Group 3: Market Dynamics and Historical Context - The current market environment, characterized by a bull market and the AI boom, has allowed stocks with questionable fundamentals to rise significantly [10]. - Historical parallels are drawn to the dot-com era, where companies with shaky fundamentals were added to the S&P 500, only to be removed after the market correction [10][11]. Group 4: Investor Perception and Stock Performance - Inclusion in the S&P 500 is perceived as a milestone for companies, often leading to a temporary rise in stock prices due to index tracking funds needing to purchase shares [15][16]. - However, this inclusion does not alter the underlying fundamentals of the companies, and sustained performance is necessary for long-term stock price increases [16].