What Does the S&P 500 Tell You About Stocks?

How the S&P 500 Tells You About America's Health

NYSE outside
The New York Stock Exchange, where the shares of the companies listed by the S&P 500 are traded. Photo: Spencer Platt/Getty Images

Definition: The S&P 500 is a stock market index that tracks the 500 most widely held stocks ​on the New York Stock Exchange or NASDAQ. It seeks to represent the entire stock market by reflecting the risk and return of all large cap companies. S&P stands for Standard and Poor, which are the names of two financial companies that merged.

How It Works

The S&P 500 tracks the market capitalization of the companies in its index.

Market capitalization, or market cap, is the total value of all shares of stock a company has issued. It's calculated by multiplying the number of shares issued by the stock price. The S&P 500 captures 80 percent of the total market cap of the entire stock market. 

To be included in the S&P 500, a company must be located in the United States and have a market cap of at least $5.3 billion. At least 50 percent of the corporation's stock must be available to the public. Its stock price must be at least $1 per share. Finally, it must have at least four consecutive quarters of positive earnings. The S&P 500 also includes Real Estate Investment Trusts and business development companies. (Source: S&P Dow Jones Indices Methodology.)

In 2017, the 10 largest companies in the S&P 500 (with a weighted market cap) were Apple, Microsoft, Amazon, Facebook, Johnson & Johnson, Exxon Mobil, Berkshire Hathaway, JP Morgan Chase, Alphabet A and Alphabet C (formerly Google).

The makeup of the S&P 500 industries reflects that of the economy. The 2017 sector percentages in the S&P 500 were Information Technology (23.2 percent), Health Care (13.9 percent), Financials (13.7 percent), Consumer Discretionary (12.5 percent), Consumer Staples (9.4 percent), Utilities (3.3 percent), Materials (2.8 percent) and Telecom Services (2.2 percent).

(Source: "Sector Breakdown," S&P 500 Factsheet.)

How Is the S&P 500 Different from Other Stock Market Indices?

The S&P 500 has fewer large cap stocks than the Dow Jones Industrial Average. The Dow tracks the share price of 30 companies that best represent their industries. Its market capitalization accounts for almost one-quarter of the U.S. stock market. The Dow is the most quoted market indicator in the world.

The S&P 500 has less technology related stocks than the NASDAQ. The NASDAQ also counts stock of companies that are privately owned. 

Despite these differences, all stock indices move pretty closely together. If you focus on one, you will understand how well the stock market is doing. In other words, you don't have to follow all three.

History and Ownership

The S&P 500 was created in 1957 by Standard & Poor. McGraw-Hill acquired it in 1966. The S&P Dow Jones Indices owns it now. That is a joint venture between McGraw Hill Financial, CME Group and News Corp, the owner of Dow Jones. The S&P Dow Jones Indices publish over one million indices. (Source: “History,” Standard & Poor.)​

How to Use the S&P 500 to Make Money

The S&P 500, like any measurement of the stock market, is often used as an leading economic indicator of how well the U.S. economy is doing.

If investors are confident in the economy, they will buy stocks. Some experts believe the stock market can often predict by about six months what the savviest investors think the economy will do.

Besides following the S&P 500, you should also follow the bond market. Generally, when stock prices go up, bond prices go down. There are many different types of bonds. They include Treasury bondscorporate bonds and municipal bonds. Bonds provide some of the liquidity that keeps the U.S. economy lubricated. Their most important effect is on mortgage interest rates. To help you follow the bond market, Standard & Poor's, the company that created the S&P 500, also rates bonds.

The S&P 500 only measures U.S. stocks. You should also keep an eye on foreign markets. That includes emerging markets like China and India.

It's also good to keep 10 percent of your investments in commodities, like gold. They tend to hold value longer when stock prices drop.