Palantir: A Potential Victim of the S&P 500 Inclusion Effect

Palantir is set to join the S&P 500 on September 23rd, a significant milestone that immediately boosted the stock’s value. The stock surged by 14% following the announcement. In addition to Palantir, Dell Technologies and Erie Insurance also experienced similar spikes in their stock prices due to the news.

This pattern of price increases is often attributed to the “S&P 500 inclusion effect,” where a stock’s price rises sharply upon news of its addition to a popular index. However, this spike is often short-lived, with prices stagnating or declining after the actual inclusion date.

Palantir’s Role in the S&P 500 Inclusion Effect

The “S&P 500 inclusion effect” is driven by the fact that approximately $16 trillion in assets follow or track the S&P 500. Fund managers aiming to closely replicate the performance of this index are obligated to purchase shares of all the underlying assets. As of September 23rd, Palantir, Dell, and Erie will be added to that list.

Although Palantir’s weight in the index may be small (possibly around 0.1%), that small percentage of $16 trillion still represents a massive influx of capital into the stock. This sudden surge in demand led to Palantir’s 14% increase, but history suggests that the excitement may fade once the stock officially becomes part of the index.

Long-Term Outlook for Palantir and Valuation Concerns

Despite the short-term price surge, there are concerns regarding Palantir’s long-term performance. Historically, stocks added to the S&P 500 often experience stagnation or even decline after their inclusion.
This is partly because stocks selected for inclusion have already experienced substantial price appreciation, making further gains difficult. For instance, Palantir’s stock has already risen by 102% year-to-date, presenting challenges for continued short-term growth.

A key factor in Palantir’s inflated value is the wave of buyers looking to capitalize on its inclusion. However, the company’s underlying earnings have not significantly changed. A parallel can be drawn with Tesla, which saw a 50% spike in anticipation of its addition to the S&P 500, only for its stock price to stagnate afterward.

Palantir currently trades at 200x its earnings, and 80x next year’s expected earnings—figures that many consider to be unsustainable. While the AI sector remains promising, Palantir’s current valuation appears excessive. Investors may want to explore other AI stocks that offer high growth potential at more reasonable prices.

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