What is the S&P 500?

The S&P 500 (Standard & Poor's 500) is a stock market index that tracks the performance of 500 leading publicly traded companies in the United States. Maintained by S&P Dow Jones Indices, it is widely regarded as the single best gauge of large-cap US equity performance and serves as the benchmark against which most investment managers, hedge funds, and ETFs measure their returns.

The index is market-capitalization-weighted, meaning larger companies have a proportionally greater influence on its value. As of recent years, the largest components (Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, and Tesla) have accounted for a significant share of the index's total market cap, a concentration that has drawn attention from investors concerned about diversification.

To be included in the S&P 500, a company must meet several criteria: it must be a US company, have a market cap above roughly $18 billion, have positive earnings in the most recent quarter and over the trailing four quarters combined, and have adequate trading liquidity. A committee at S&P Dow Jones makes inclusion decisions, meaning the index is not purely mechanical.

The S&P 500's long-term historical return has averaged roughly 10% per year including dividends, or about 7% after inflation. However, returns are highly variable from year to year, ranging from gains of over 30% to losses of more than 30% in extreme years. The index has experienced bear markets (declines of 20% or more) approximately every 5-10 years on average.

For most investors, the S&P 500 is accessible through index funds and ETFs, with the SPDR S&P 500 ETF Trust (SPY) being the most heavily traded security in the world. The rise of passive investing has meant that flows into S&P 500 index funds now represent a massive share of total equity market activity, creating debates about whether passive investing affects price discovery and market efficiency.