Palantir and Dell Join the S&P 500: What Investors Need to Know
The Impact of S&P 500 Inclusion
Historical Performance of Newly Added Stocks
Historically, stocks added to the S&P 500 experience a notable uptick in their prices. This phenomenon is primarily driven by the influx of investment from funds that track the index. According to research, stocks can see a significant price increase shortly after being added to the S&P 500. For instance, Palantir’s shares rose as much as 8.4% in after-hours trading following the announcement, reflecting a year-to-date increase of over 75%. Similarly, Dell’s shares jumped as much as 8.7% after reporting better-than-expected revenue due to increased sales of AI-focused servers.
The Role of Index Funds
The S&P 500 is a benchmark for approximately $11.4 trillion in funds, meaning that newly added companies can expect substantial buying activity from passive ETFs. This influx of investment often leads to a boost in their stock prices. For example, the SPDR S&P 500 ETF Trust (SPY), the largest ETF, has over $500 billion in assets under management. As new members are added, many funds and ETFs must purchase shares of these companies, leading to a potential uplift in their stock prices.
Palantir Technologies: A Closer Look
Stock Performance and Market Reaction
Palantir Technologies has seen a significant jump in its stock price following the announcement of its inclusion in the S&P 500. The stock surged 14% on Monday, reaching its highest level since early 2021. As of Monday, Palantir’s shares closed at $34.60, approximately 11% below its January 2021 closing high of $39. The company’s stock has nearly doubled over the past year, driven by its strong performance in artificial intelligence (AI) software. Palantir has reported profits for seven consecutive quarters, including its largest quarterly profit in its twenty-year history.
Key Price Levels and Analyst Recommendations
Key price levels to monitor for Palantir include resistance around $32.70 and a potential target of $34.75, calculated using the distance from the ascending triangle’s trendlines. On the downside, initial support is expected at $29, with further support at $25.50, representing a potential decline of 16% from the recent closing price. Despite the positive market reaction, analysts caution that the initial boost does not necessarily indicate long-term investment viability. Wall Street’s consensus recommendation for Palantir is a “Hold,” with a price target of $25.69, indicating a 24% discount to its current price.
Dell Technologies: A Closer Look
Stock Performance and Market Reaction
Dell Technologies has also experienced a significant boost in its stock price following the announcement. The stock rose nearly 4% after the news broke, and as of Monday, it was trading at $106.46. Despite experiencing a 22% drawdown in the current quarter, Dell’s shares are still 39% higher year-to-date. The company’s market cap exceeds $72 billion, and it has reported a 90% increase in its stock price in 2023, with a 33% increase earlier in the year before the S&P announcement.
Revenue Growth and Analyst Recommendations
Dell’s recent stock price increase can be attributed to its better-than-expected revenue, driven by increased sales of AI-focused servers. The company’s 14-day Relative Strength Index (RSI) is at 28, indicating it is in “oversold” territory. Analysts have a more favorable consensus for Dell, with 12 out of 22 analysts recommending a “Buy.” This positive outlook is supported by Dell’s strong financial performance and its strategic focus on AI and other high-growth areas.
The Broader Market Context
S&P 500 Index Performance
The S&P 500 has shown a robust long-term performance, with a year-to-date return of 14.69% as of the current year. The index has experienced various fluctuations over the years, with notable annual total returns such as 24.2% in 2023 and 28.71% in 2021. However, it has also faced significant downturns, such as a 39.23% drop in 2008 during the Great Recession. The index’s composition has evolved over time, transitioning from a manufacturing-heavy index to one that includes significant technology, health care, and financial sectors.
Implications of High Valuations
The current high valuations of the S&P 500, indicated by the Shiller CAPE ratio at 35.7, predict low annualized returns of around 3% over the next decade. This is concerning given that the index has historically provided 10.9% annualized returns since 2008. John Hussman’s analysis predicts an annualized return of -6% over the next 12 years based on extreme valuation metrics. These high valuations could impact the performance of newly added companies like Palantir and Dell as part of the broader index.
Conclusion
The inclusion of Palantir Technologies and Dell Technologies in the S&P 500 is a significant milestone for both companies. Historically, stocks added to the S&P 500 experience a notable uptick in their prices due to the influx of investment from funds that track the index. Palantir and Dell have already seen significant stock price increases following the announcement, driven by their strong financial performance and strategic focus on high-growth areas like AI.
However, investors should exercise caution and conduct their own due diligence regarding the long-term outlook of these companies. While the initial boost from S&P 500 inclusion is promising, it does not necessarily indicate long-term investment viability. The broader market context, including high valuations and potential low future returns, should also be considered when making investment decisions.
In summary, the inclusion of Palantir and Dell in the S&P 500 is a positive development that has already led to significant stock price gains. However, investors should carefully evaluate the long-term prospects of these companies and the broader market conditions before making investment decisions.
