The S&P 500 is one of the most competitive and well-known of the various stock markets out there. It is not actually a stock, of course, but rather an index. More specifically, the Standard & Poor’s 500 is a weighted index of 500 of the top publicly traded companies in the United States.
It is adjusted by a company’s market capitalization and the amount of stock available. The S&P is largely thought to be an approximate measure of how the stock market is performing. As such, it is an important metric for determining the overall health of the stock market.
However, like any stock in an index, there are companies that are simply not capable of staying within the S&P. Some companies will fall out of the index – and may stop operating altogether. As such, here’s a more in-depth look at how the S&P 500 works, and what companies are likely to fall out of it completely. In other words, what S&P 500 companies will crash over time?
How The S&P 500 Has Changed
The S&P 500 has been around since roughly 1923, though a more modern version of the index has only been active for the past five decades or so. During that time, the index has changed dramatically, and many of these changes are reflective of the changing nature of the United States economy as a whole.
Consider the change in the makeup of the S&P 500 from 1969 to today. In 1969, 166 of the companies were in the industry category, meaning they made things. Today, that number has dropped to a staggering 70 – a more than 50% drop.
Of course, this trend was seen throughout the nation: Industry and manufacturing declined in the United States, and other industries rose. The flip side of that is increases in technology and its role in the economy. That number rose from 16 to 68.
Keep in mind that these changes are not static. They didn’t occur in a smooth upward or down motion – like any other financial picture, sectors ebbed and flowed in their fortunes.
A variety of other factors had an impact on the makeup of the S&P 500, including changes in overall economic patterns, the age of the company, and specific worldwide events. Defense and military-related stock tend to increase during times of war, and consumer discretionary increases during good economic times.
“Black swan” events can also have a major impact. For example, the COVID-19 pandemic unquestionably hurt some sectors of the economy more than others, with retail, restaurant, and tourism stocks all showing slumps that have dropped many out of the S&P 500.
Most Companies Don’t Stay In S&P 500
Quite simply, most companies do not have the staying power that they once did, and more often than not, a company will not be able to last long in the S&P 500. This is for two primary reasons.
First, companies in the S&P 500 simply stop existing. A McKinsey study surveyed S&P companies. It found that these companies lasted an average of 61 years in 1958. Today, that number has dropped dramatically, with companies only lasting 18 years.
There are many reasons for this. Certainly, company bankruptcy may play a role. However, S&P 500 companies are often successful, so another reason is that they may be purchased or merged with another company, thus causing the stock to no longer exist.
Second, companies often lack the financial strength to make it in the S&P. They may suffer from overvaluations and fall out shortly after their IPOs.
They may be out-innovated by new, shiny products or services, then bumped out. Either way, these companies simply may not be able to hack it anymore – and they are removed.
S&P 500 Is Survival Of The Fittest
Remember, it’s the S&P 500 – not the S&P 500+. As one new company comes in, another must go out. This sets up a strange dynamic within the S&P 500: It is a survival of the fittest competition to remain in this index.
There are many reasons that companies don’t make it on the S&P. Examples include:
- An inability to innovate to new products and a failure to recognize new evolving threats, like Blockbuster or Borders books.
- Accounting scandals or fraud, like Worldcom or Enron
- Taking on too much debt to be sustainable, such as TWA or Tower Records
- Short-term stocks that have a lot to gain for a variety of reasons – but then crash due to long-term challenges. Meme stocks, like GameStop or Blackberry, come to mind.
S&P 500 Companies That Will Crash
So, the big question: What stocks WILL crash? It is impossible to completely answer this question, as stocks can crash for any reason. However, there are absolutely some stocks that appear more likely than others to crash at the moment. Here’s what they are and why:
- Gamestop (GME): Gamestop was the first meme stock to hit it big, with massive price increases – fueled largely by retail investors – sending the price of the stock screaming upwards last year. However, it has since come back to earth. As of this writing, the stock is roughly $108 a share – nearly 2/3 off of its all-time high of $325, a high that was driven as a joke more than anything else. The fundamentals of the company remain weak, and its business model is a challenge. A future crash still seems likely.
- The Gap (GPS): The veritable clothing brand has had a long history of ups and downs, but at the moment, they are nearly 53% off of their 52 week high. Such a trend is worrying, Less than 20% of analyst ratings rate it as a buy, with the vast majority having them as a hold. This would imply that there’s a consensus around GPS stock – and it’s not a good one.
- Proto Labs (PRLB): This manufacturing company has seen hit after hit, including major crashes this month and turnover in their C-level executives. The fact that it is a manufacturer also hurts this stock: Rising interest rates negatively impact these businesses, as they need debt to continue to push out capital and make necessary improvements.
- Pennett Group (PNTG): As a health care company in the middle of a global pandemic, you might think PNTG would be well-positioned. However, the company is nearly 70% off of its 52-week high. This is because of declining revenue and COVID-19 shortfalls. However, a health care company that can’t do well during a pandemic is clearly struggling.
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