S&P 500 Inclusion and Its Impact on High-Growth Tech Stocks

The S&P 500 has long been a barometer of market confidence, and its inclusion of high-growth tech stocks like Robinhood (HOOD) and AppLovin (APPLOVIN) has ignited a frenzy of speculation. With both companies set to join the index on September 22, replacing Caesars Entertainment and MarketAxess Holdings, investors are grappling with the psychological and valuation implications of this move.

The Index Inclusion Effect: A Double-Edged Sword
When a stock is added to the S&P 500, it typically triggers a short-term price surge driven by institutional demand. Passive funds and ETFs must mechanically purchase shares to align with the index, creating a “free money” effect. For example, Datadog (DDOG) surged 15% on its inclusion announcement, while Tesla’s stock jumped 70% in 2020 [1]. However, this initial euphoria often gives way to underperformance. Research shows that newly added stocks underperform the index by an average of 1.7 percentage points in the 21 days post-inclusion [2]. This pattern, observed in companies like Palantir, reflects a mean reversion in valuation multiples as the market recalibrates expectations [3].

Robinhood and AppLovin, both high-growth darlings, are no exception. Robinhood’s share price has already risen over 150% this year, partly fueled by retail investor enthusiasm and index inclusion speculation [1]. AppLovin, meanwhile, has climbed 6% since the announcement, despite skepticism from short sellers questioning its operational metrics [1]. The question now is whether these gains are sustainable or if they’ll face the same post-inclusion drag as Tesla and others.

Market Psychology: Retail Hype vs. Institutional Discipline
The inclusion of Robinhood and AppLovin has exposed stark contrasts in investor behavior. Institutional investors, bound by index-tracking mandates, will mechanically buy these stocks, ensuring an immediate price boost. But retail investors, often swayed by social media and FOMO, may amplify volatility. During the 2023-2024 bull market, retail investors exhibited delayed reactions, selling during early gains and piling in later, exacerbating swings [4]. This herd behavior can inflate valuations beyond fundamentals, creating a precarious setup for mean reversion.

For instance, Robinhood’s inclusion has already drawn comparisons to the GameStop frenzy, with Reddit threads buzzing about its “democratizing” appeal. Yet, unlike traditional tech darlings, Robinhood’s business model—reliant on trading volume and market sentiment—leaves it vulnerable to sudden shifts in retail appetite. AppLovin, a mobile gaming giant, faces similar risks, as its user growth and monetization metrics are subject to cyclical demand [1].

Valuation Implications: The High-Cost of Index Validation
High-growth tech stocks often trade at premium multiples, justified by aspirational revenue forecasts. However, S&P 500 inclusion can force these valuations to realign with market averages. Tesla’s post-inclusion trajectory illustrates this: after its 2020 surge, its price-to-sales ratio contracted from 15x to 8x as investors demanded clearer profitability [6]. Similarly, Robinhood and AppLovin may face pressure to deliver consistent earnings, or risk multiple compression.

The challenge is compounded by the fact that both companies lack the revenue scale of established index constituents. Robinhood’s $12 billion market cap (as of early 2025) and AppLovin’s $25 billion valuation pale next to the likes of Microsoft or Apple. While the S&P 500’s minimum market cap threshold of $22.7 billion ensures some level of quality, it also invites scrutiny over whether these stocks belong in a cap-weighted index [1].

Conclusion: A Cautionary Bull Case
The inclusion of Robinhood and AppLovin in the S&P 500 is a validation of their growth trajectories, but investors must tread carefully. The initial price pops are largely algorithm-driven, and the long-term outlook hinges on execution. For Robinhood, this means proving its brokerage model can adapt to a post-zero-commission world. For AppLovin, it means demonstrating that user engagement can translate into sustainable revenue.

As the September 22 deadline approaches, the market will test whether these stocks can justify their lofty valuations—or if they’ll join the ranks of index darlings that faltered after the spotlight faded. In the words of one seasoned fund manager: “The S&P 500 is a popularity contest, but popularity doesn’t pay the bills.” [5]

Source:
[1] AppLovin and Robinhood added to S&P 500 [https://www.cnbc.com/2025/09/05/applovin-robinhood-sp-500.html]
[2] Stock Price Reactions to Index Inclusion [https://www.nber.org/digest/nov13/stock-price-reactions-index-inclusion]
[3] History Says Being Added to S&P 500 Will Have This Impact [https://finance.yahoo.com/news/history-says-being-added-p-083500408.html]
[4] Revisiting the S&P 500 Index Effect: A Powerful Signal is Returning to Markets [https://medium.com/technicity/revisiting-the-s-p-500-index-effect-a-powerful-signal-is-returning-to-markets-60ef8729e8b2]
[5] Revisiting Tesla's Addition to the S&P 500: What's the Cost [https://www.researchaffiliates.com/publications/articles/832-revisiting-teslas-addition-to-the-sp500]