Tesla's joining S&P 500 can fuel record rally

Tesla Inc's inclusion into the S&P 500 could be the latest acceleration boost to keep the record-breaking rally in stocks going.

The benchmark index is up 12 per cent this year - an impressive performance considering the pandemic, but paling in comparison to the Nasdaq 100, which includes Elon Musk's automaker. That gauge is up 38 per cent in 2020, driven by a nearly 400 per cent increase in Tesla's share price as the company starts to find a path to profit.

Now with Tesla set to join the 500 club, its outperformance could help boost stocks already benefiting from positive news out of coronavirus vaccine makers as well as the results of the US elections.

"Tesla's addition will help the S&P Index to reduce its lag versus other gauges such as Nasdaq 100 Index," Brian Freitas, an analyst at Smartkarma, said by phone.

Tesla's addition will also trigger an unprecedented flurry of buying from funds tracking the index. Freitas estimates passive money following the S&P 500 Index will have to buy $58 billion worth of shares.

When Tesla hits S&P 500, It'll spark wildest passive trade ever.

And then there's the Robinhood gang -- the retail investors whose passion for Tesla has fuelled its share price far beyond what almost any Wall Street analyst would have thought realistic at the start of the year. Having missed out on inclusion into the S&P 500 in early September, the inclusion helps keep the Tesla-to-the-moon narrative on track.

"Clearly this is a key positive for shares and indexing purposes," Wedbush Securities analyst Daniel Ives wrote in a note, "and ultimately removes another question mark around the Tesla story going forward."

Tesla shares rose as much as 15 per cent in after-market trading.

With Tesla is set to be one of the largest weight additions in the past decade, according to S&P Dow Jones, it's so large that it may need a special two-step entry. The Palo Alto, California-based company would likely be among the top 10 biggest stocks on the index, with a weighting of more than 1%. The stock removed from the index will be announced at a later date.

Tesla is so huge it may take two steps to put It in the S&P 500

Tesla may be added all at once before trading on Dec 21 or may be placed on the index in two tranches with the first tranche coming Dec. 14, S&P Dow Jones said, in a notice soliciting opinion on the best option. (Bloomberg)