The Standard & Poor’s 500 Index (S&P 500) is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large-cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market; other S&P indexes include small-cap companies with market capitalization between $300 million and $2 billion, and an index of mid-cap companies. Investment products based on the S&P 500 include index funds and exchange-traded funds are available to investors.
The S&P 500 is widely regarded as the most accurate gauge of the performance of large-cap American equities. While the S&P 500 focuses on the large-cap sector of the market; it is considered representative of the market because it includes a significant portion of the total value of the market. The 500 companies included in the S&P 500 are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. These experts consider various factors when determining the 500 stocks that are included in the index, including market size, liquidity and industry grouping.
The S&P 500 has become a preferred index for U.S. stocks, unseating the Dow Jones Industrial Average (DJIA). The S&P 500 is perceived as more representative of the market because it is made of 500 companies, compared to the DJIA’s 30. There is also a major difference in how companies are represented in either index. The S&P 500 uses a market cap methodology, giving a higher weighting to larger companies, whereas the DJIA uses a price weighting methodology which gives more expensive stocks a higher weighting. The market cap ranking is also seen as more representative of real market structure.
The P/E 10 ratio is a valuation measure, generally applied to broad equity indices, that uses real per-share earnings over a 10-year period. The P/E 10 ratio uses smoothed real earnings to eliminate the fluctuations in net income caused by variations in profit margins over a typical business cycle. The ratio was popularized by Yale University professor Robert Shiller, who won the Nobel Prize in Economic Sciences in 2013. It attracted a great deal of attention after Shiller warned that the frenetic U.S. stock market rally of the late-1990s would turn out to be a bubble. The P/E 10 ratio is also known as the “cyclically adjusted PE (CAPE) ratio” or “Shiller PE ratio.”