The S&P 500 is considered to be a great indicator of how the U.S. stock market is doing — here’s why.

The S&P 500 index is a basket of 500 of the largest U.S. stocks, weighted by market capitalization. The index is widely considered to be the best indicator of how large U.S. stocks are performing on a day-to-day basis.

The composition of the S&P 500

As we mentioned, the S&P 500 consists of 500 large-cap U.S. stocks, which combine for about 80% of all U.S. market capitalization. For this reason, the S&P 500 is considered to be a good indicator of how the U.S. markets are doing.

To be added to the S&P 500, the following criteria must be met:

  • It must be a U.S. company.
  • The market cap must be $5.3 billion or more.
  • The public float must consist of at least 50% of outstanding shares.
  • It must have positive reported earnings in the most recent quarter, as well as over the four most recent quarters.
  • The stock must have an active market and must trade for a reasonable share price.

Meeting these criteria isn’t a guarantee that a stock will join the S&P 500 — these are just the minimum requirements.

As of 31 Oct, 2018, the 10 largest constituents in the S&P 500 are:

  • Apple Inc.
  • Microsoft Corp
  • Inc.
  • Berkshire Hathaway (B Shares)
  • Johnson & Johnson
  • JP Morgan Chase & Co.
  • Facebook Inc.
  • Exxon Mobil Corp.
  • Alphabet Inc. (C Shares)
  • Alphabet Inc. (A Shares)

The weighting of the S&P 500

As we mentioned, the index is weighted by market capitalization.

Market-cap weighting means that the portion of the index represented by each company is proportional to its market capitalization. For example, Apple is the largest component of the S&P 500, and its market cap is equal to about 2.9% of the index total, so this much of the index is dependent on Apple’s performance.

Unlike the Dow Jones Industrial Average, which is price-weighted, the S&P 500 is considered a better picture of how stocks (and therefore investors) are doing, since it is influenced more by the performance of larger companies that make up more of investors’ portfolios.