Goldman says Tesla inclusion won’t make S&P 500 much pricier

Tesla’s entry into the S&P 500 Index subsequent week won’t make the US benchmark as costly as buyers may count on, Goldman Sachs Group Inc. says.

Although the electrical carmaker’s eye-watering rally has pushed its shares close to 170 instances the consensus 2021 earnings estimate, its addition will solely have a minimal affect on the benchmark’s valuations due to a nuance in index metric calculations, confounding the “instinctive conclusion” of many buyers, Goldman strategists led by David J. Kostin wrote in a December 16 observe.


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Tesla shares have surged 644% this yr, pushing the corporate’s market worth near $600 billion, of which about 80% is floating. And though S&P 500 constituents are weighted in response to their free float cap, index metrics conventionally deal with the benchmark as an combination of its particular person constituents relatively than a cap-weighted common, in response to Goldman.

“Given Tesla’s large size and elevated multiple, many investors erroneously intuit that the company’s inclusion into the S&P 500 will lift the index’s current 22x P/E multiple — which already registers close to the highest levels on record — by two multiple turns or more,” Kostin and his colleagues wrote. Instead, “it will lift the index P/E ratio by just 0.4 multiple turns.”

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