S&P 500 Rebalancing: How Index Inclusion and Exclusion Shape Market Dynamics and Investment Strategy

The S&P 500's quarterly rebalancing is more than a routine administrative exercise—it is a powerful catalyst for market dynamics, driving both short-term volatility and long-term strategic value. On March 24, 2025, the index added four companies—DoorDash (DASH), TKO Group Holdings (TKO), Williams-Sonoma (WSM), and Expand Energy (EXE)—while removing Discover Financial Services (DFS), BorgWarner (BWA), Teleflex (TFX), Celanese (CE), and FMC (FMC). These changes highlight how index inclusion or exclusion can reshape stock performance, investor sentiment, and capital allocation.

The Short-Term Surge: Index Inclusion and Immediate Price Reactions

When a company is added to the S&P 500, the immediate effect is often a surge in its stock price. This is driven by two forces: institutional demand from index-tracking funds, which must buy shares to align with the new composition, and the psychological boost of “blue-chip” status. In March 2025, DoorDash (DASH) saw a 6% jump in extended trading after its inclusion, while TKO (TKO) rose 2.6%. These moves were not isolated; historically, newly added stocks often outperform the broader market in the weeks following the rebalance.

The rationale for these gains is twofold. First, index funds must purchase the stock to maintain their portfolios, creating artificial demand. Second, the inclusion often signals market recognition of a company's growth potential or sector relevance. For example, DoorDash's $75 billion market cap at the time of inclusion reflected its dominance in food delivery and its expansion into groceries and home improvement. Similarly, Expand Energy (EXE), a clean energy merger product, was added as the world's largest independent natural gas producer, aligning with investor interest in energy transition plays.

However, the short-term boost is not a guarantee of long-term success. Investors must distinguish between a temporary price pop and a company's underlying fundamentals. DoorDash's 70% surge in 2024, for instance, was driven by strong financials—including $5.34 billion in cash and a 21% sales growth forecast—making its inclusion justified. In contrast, TKO Group Holdings (TKO), with a market cap of $14 billion, raised eyebrows for its inclusion, as it narrowly met the size threshold. While TKO's stock gained 74% in 2024, its 14,800% EPS growth projections in 2025 appear inflated, suggesting a speculative edge to its rally.

The Short-Term Dip: Index Exclusion and Selling Pressure

The opposite effect occurs when companies are removed. On March 24, 2025, DFS, BWA, TFX, CE, and FMC were excluded, triggering mechanical selling by index funds. While specific post-removal price data is not available in the current analysis, historical trends suggest these stocks likely experienced short-term declines. Discover Financial Services (DFS), for example, had been a long-time S&P 500 component, and its removal would have prompted institutional investors to divest shares, reducing liquidity and potentially depressing its price.

The exclusion of BorgWarner (BWA) and Teleflex (TFX) also underscores how the S&P 500's criteria—market cap, sector representation, and financial health—can shift a company's fortunes. BorgWarner, a key supplier to the automotive industry, may have fallen short due to sector overrepresentation, while Teleflex's medical device business might have been deemed less relevant to the index's evolving composition.

Long-Term Value: Beyond the Index's Influence

While the immediate price reaction to inclusion or exclusion is significant, the long-term performance of these companies hinges on their fundamentals. DoorDash's inclusion, for example, was a recognition of its strategic expansion into retail and its $1.2 billion net income in FY 2024. Similarly, Expand Energy's $5 billion in 2024 revenue and $1.8 billion in EBITDA position it as a leader in the energy transition, regardless of its index status.

Conversely, the exclusion of Coinbase Global (COIN)—which did not make the March 2025 cut—highlights the S&P 500's focus on stability and sector representation. While COIN's stock had surged 50% in 2024, its volatility and regulatory uncertainties made it a poor fit for an index that prioritizes large-cap, stable companies. This exclusion, though initially disappointing for crypto investors, reflects the index's role as a barometer of economic resilience rather than speculative trends.

For the removed companies, the long-term outlook remains tied to their operational performance. Discover Financial Services, for instance, could still thrive if it leverages its $14 billion in assets to expand its digital banking services. BorgWarner and Teleflex, meanwhile, must innovate to maintain their competitive edges in automotive and medical sectors.

Strategic Implications for Investors

The March 2025 rebalancing offers valuable lessons for investors. First, index inclusion is not a free pass. While the short-term price boost is real, it should not overshadow a company's ability to sustain growth. DoorDash's 669% EPS growth forecast in 2025, for example, is only achievable if it maintains its market leadership and execution.

Second, index exclusion does not equate to obsolescence. Companies like FMC (a chemical and agricultural business) or Celanese (a materials company) may still offer attractive long-term value if they adapt to industry trends. Investors should evaluate these stocks based on their own fundamentals, not just their index status.

Third, diversification remains key. The S&P 500's quarterly rebalancing ensures the index remains representative of the U.S. economy's evolving structure. Investors who focus solely on index components risk missing opportunities in smaller or emerging sectors. Coinbase's exclusion, for instance, underscores the importance of including crypto and fintech exposure outside the S&P 500.

Conclusion: Balancing Short-Term Signals with Long-Term Vision

The S&P 500 rebalancing is a double-edged sword. It creates immediate volatility through mechanical buying or selling but offers little insight into a company's long-term trajectory. For investors, the challenge lies in separating the noise of index changes from the substance of business performance.

In March 2025, DoorDash and Expand Energy demonstrated how inclusion can amplify a company's visibility and attract capital. Conversely, the removal of DFS and BWA served as a reminder that the index's criteria are fluid and not a permanent seal of approval. By focusing on fundamentals—revenue growth, profitability, and sector relevance—investors can navigate the S&P 500's rebalancing cycle with a strategic, long-term mindset.