Tesla’s entry into the S&P 500 is expected to prompt record trading as index-tracking funds rebalance their portfolios.
S&P estimates that nearly 130 million shares of the electric vehicle maker will need to be purchased to add to the S&P 500. At the current market price, indexers would have to buy more than $85 billion of the company’s stock. Unofficial “closet indexers” could double that figure.
Tesla enters the index on Monday, but the trading takes place at the close of market on Friday.
“Two unprecedented phenomena will be converging,” Steve Sosnick, chief options strategist at Interactive Brokers, wrote in a note. “The index has never added such an immensely large stock at the same time that options volumes and open interest are at record highs.”
Sosnick continued, “There is a potential for massive market-on-close imbalances because this is the biggest stock entry ever. There is an awful lot of money that will be sloshing around at that time.”
Recently, Nasdaq reassured investors it was prepared. “As Nasdaq and the securities industry prepare for the upcoming quadruple witching and S&P 500 rebalance, Nasdaq is highly confident that its systems will provide the reliability and capacity required to ensure a smooth, successful rebalance,” the exchange said.
The largest rebalance on record was $50.8 billion in September 2018.
In an analyst note, Goldman Sachs said the inclusion of the company would push the earnings ratio of the entire index up 0.4 times toward its highest valuation ever. “Tesla’s multiple of earnings is very high in nominal terms for any company in any industry at any time in history,” Goldman said. Goldman’s target price is $780.
Analysts are wildly divided over how the company should be valued. Elazar Advisors estimates a target price of $774. Other analysts have much lower targets.
Tesla shares were at $663 in midday trading Friday.
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