What Happens When a Stock Is Dropped From the S&P 500?

Being listed on the S&P 500 is a hallmark of success for many companies, symbolizing market leadership and investor confidence. However, it’s not uncommon for companies to sometimes be delisted from this prestigious index. In fact, the average life span of a company on the S&P 500 is about years.

Delisting can occur for several reasons and may have immediate negative consequences for the company and its investors, affecting stock prices and market perceptions.

Understanding what happens when a stock is delisted from the S&P 500 is crucial for investors and stakeholders. Read on to better understand the reasons behind delisting, its impact, and how recent examples shed light on this aspect of the stock market.

The S&P 500: An Overview

The S&P 500, short for Standard & Poor’s 500, is one of the most widely followed stock market indexes in the world. It represents the performance of 500 large companies listed on stock exchanges in the U.S.

Along with the Dow Jones Industrial Average (DJIA) and the Nasdaq composite, the S&P 500 is considered one of the main benchmarks of the U.S. stock market’s health and performance.

The index is host to many of the world’s most important companies and household names, including the following (by market cap weight as of the fourth quarter of 2024):

1. Apple Inc. (AAPL) – Technology – 7.0%
2. Microsoft Corporation (MSFT) – Technology – 6.5%
3. NVIDIA Corporation (NVDA) – Technology – 6.2%
4. Alphabet Inc. Class A + C (GOOGL+GOOG) – Communication Services – 3.7%
5. Amazon.com Inc. (AMZN) – Consumer Discretionary – 3.4%
6. Meta Platforms Inc. (META) – Communication Services – 2.4%
7. Berkshire Hathaway Inc. Class B (BRK.B) – Financials – 1.8%
8. Eli Lily (LLY) – Healthcare/Pharma – 1,6%
9. Broadcom (AVGO) – Telecom & Semiconductors – 1.5%
10. UnitedHealth Group Incorporated (UNH) – Healthcare – 1.3%

Criteria for Inclusion in the S&P 500

The S&P 500 has specific criteria for including companies in the index. While the choice by S&P 500 about inclusion is more than just specific measures, these are the main thresholds a company must meet:

1. Market capitalization: The company must have an unadjusted market cap of at least $14.6 billion.
2. Public float: At least 10% of its overall shares must be available to the public.
3. Financial viability: The sum of the most recent four consecutive quarters’ earnings should be positive, as should the most recent quarter.
4. Liquidity: Adequate liquidity (enough market makers or trading volume) and a reasonable share price.
5. Domicile: Must be a U.S. company.
6. Public offering: The company must have had a public offering at least 12 months before.
7. Sector representation: The company should contribute to the balance of sectors held within the index.

The S&P 500 is not simply a list of the 500 largest companies by market capitalization. The inclusion process involves careful consideration by the index committee. They meet quarterly to review which companies to add or drop. The committee also monitors for significant developments (such as mergers, bankruptcies, or restructuring) that might affect index composition.

While meeting the inclusion criteria is necessary, it doesn’t guarantee being included. The committee has discretion when adding new companies. When adding or removing companies, the committee aims to decrease index turnover while ensuring the index represents the large-cap U.S. equity market.

Why Are Companies Dropped From the S&P 500?

Companies can be removed from the S&P 500 for various reasons, which we can broadly categorize into voluntary and involuntary delistings:

Voluntary Delisting

Some companies delist themselves from the S&P 500 or other major indexes. Reasons for voluntary delisting include the following:

• Going private: A company may decide to go private through a buyout, removing itself from public trading. For example, Dell Technologies Inc. (DELL) voluntarily delisted from the stock market in 2013 when it went private; it returned to public trading in 2018.
• Mergers and acquisitions: If a company is acquired by or merges with another company, it may no longer exist as a separate entity.
• Reducing costs: Some companies delist to cut the expenses related to maintaining the criteria for a listing on the index.

Involuntary Delisting

More commonly, companies are involuntarily removed from the S&P 500 because of failing to meet the index’s criteria. Reasons can include the following:

1. Market capitalization decline: If a company’s market value falls below the S&P 500’s threshold.
2. Liquidity issues: Insufficient trading volume or free float. For example, in 2024, Whirlpool Corporation (WHR) was removed from the S&P 500 because of its declining market capitalization, which fell below the index’s threshold.
3. Financial performance: Consistent negative earnings or other financial troubles such as looming bankruptcy.
4. Regulatory noncompliance: Failure to meet U.S. Securities and Exchange Commission or exchange requirements, which in turn gets a company removed from the index.

What Happens When a Stock is Dropped From the S&P 500?

When a stock is removed from the S&P 500, it typically has significant effects on the stock and its investors.

Impact on the Stock

Short-Term Consequences:

• Price drop: Often, there’s an immediate decrease in stock price because of selling pressure from index funds and ETFs that track the S&P 500.
• Reduced liquidity: Trading volume may decrease as the stock loses visibility among certain investors.
• Negative sentiment: The delisting is generally received as a negative signal about a company’s prospects.

Long-Term Consequences:

• Reduced institutional ownership: Many institutional investors are mandated to hold a certain amount of S&P 500 stocks (such as index funds).
• Less analyst coverage: The company may receive less attention from financial analysts if it is not part of the index.
• Turnaround signal: Some companies use the delisting as motivation to restructure and improve their financial health.

Consequences for Investors

• Holding vs. selling: Investors need to decide whether to hold onto the stock or sell. This decision should be based on the company’s fundamentals and prospects, not just its index status. Note that selling shares can trigger capital gains or losses, which have tax consequences.
• Portfolio rebalancing: Those tracking the S&P 500 index will need to sell the delisted stock and buy the replacement to maintain index alignment.
• Reduced liquidity: Buying or selling large stock quantities may become more difficult without affecting its price.

What Happens When a Stock is Added to the S&P 500?

Being added to the S&P 500 is often a significant achievement for a company. It brings several benefits, many of which are the opposite of being removed from the index:

1. Increased visibility: The addition of the stock to the index brings media attention and greater knowledge from investors.
2. Stock price boost: There’s often an immediate rise in the stock price because of buying pressure from index funds and the ETFs that track them.
3. Expanded investor base: More institutional investors and index-tracking funds will purchase the stock.
4. Rise in liquidity: Trading volumes typically increase, making it easier for investors to buy and sell shares.
5. Perceived stability: Inclusion in the S&P 500 is generally a sign of the company’s stability and importance in the market.

Companies Removed From the S&P 500 in 2024

Here are several of the major companies removed from the index in 2024:

Whirlpool

Whirlpool, a major U.S. manufacturer of home appliances, was removed from the S&P 500 index in early 2024.

Reasons for delisting:

• Significant decline in stock price
• Underperforming the broader market
• Reduced market capitalization

Effects:

• Transition to the S&P MidCap 400 index
• Its corporate credit rating was downgraded to BBB-.
• Its stock dropped to a 52-week low in the days following its removal.

American Airlines

The removal of American Airlines (AAL) from the S&P 500 in 2024 reflected broader challenges facing the airline industry and the company’s specific financial struggles.

Reasons for delisting:

• Ongoing impact of travel disruptions affecting its finances
• High debt levels
• Declining profitability compared with industry peers

Effects:

• Decreased investor confidence in the airline sector.
• Potential difficulties in securing favorable financing terms
• Increased scrutiny of the company’s turnaround efforts
• Its stock dropped to multiyear lows following its removal.

Etsy

The removal of Etsy Inc. (ETSY) from the S&P 500 was driven by changes in consumer behavior and ever more competition in ecommerce.

Reasons for delisting:

• Slowing growth rates post-pandemic
• Increased competition from larger ecommerce platforms
• Concerns about the sustainability of its business model

Effects:

• Reduced visibility among institutional investors
• Potential challenges in attracting and retaining top talent
• Need to refocus on core strengths and differentiation strategies
• Its stock dropped to multiyear lows following its removal.

Other companies removed from the S&P 500 in 2024 include the following firms:

• Zion Bancorp (ZION)
• Comerica Inc. (CMA)
• Pioneer Natural Resources (PXD)
• Bio-Rad Laboratories (BIO)
• Illumina Inc. (ILMN)

Companies Added to the S&P 500 in 2024

As companies are moved out of the S&P 500 index, new companies are added to take their place. In 2024, the following were some of those added:

• Palantir Technologies Inc. (PLTR)
• Dell Technologies Inc. (DELL)
• KKR & Co. Inc. (KKR)
• CrowdStrike Holdings Inc. (CRWD)
• GoDaddy Inc. (GDDY)
• GE Vernova Inc. (GEV)
• Deckers Outdoors Company (DECK)
• Super Micro Computer Inc. (SMCI)
• Solventum Corporation (SOLV)
• Vistra (VST)
• Erie Indemnity Company (ERIE)

The Bottom Line

Being delisted from the S&P 500 is a significant event for any company, often leading to immediate and negative consequences, such as a drop in stock price and reduced visibility. It can be voluntary because of a merger, going private, a falling market cap, or not meeting other index criteria.

However, it’s important to remember that delisting doesn’t necessarily mean a company is doomed to fail. Some companies use this as a chance to restructure, refocus, and potentially return more robust than before. For investors, a stock’s delisting from the S&P 500 should prompt a careful reassessment of the investment.