S&P rewrites stock classification rules! $375 billions in funds may be forced to rebalance, major reshuffle for growth and value stocks

According to reports from Zhihu Finance APP, after S&P Dow Jones Indices adopts new stock classification rules, growth stocks and value stocks will undergo a reshuffling. According to a statement released by the index provider on Friday, S&P will incorporate intangible assets, expected earnings, and free cash flow into its criteria for assessing whether a company is undervalued relative to its share price. At the same time, the 12-month price momentum indicator, which was used to measure a company's growth potential, will be removed. These new rules were introduced following a recent consultation and will officially take effect during the annual index reconstitution before the market opens on December 21.

The long-term underperformance of value stocks has prompted index providers to reconsider relevant rules

This adjustment may force funds tracking the relevant indices to modify their holdings to match the new index components. Bloomberg Intelligence analyst James Seyffart estimates that at least $375 billion in passive funds are tied to the affected indices.

S&P’s decision comes from a long-running debate over whether traditional value stock metrics remain effective. Researchers and fund managers believe that the prolonged slump in value stocks is partly due to flaws in the relevant metrics, especially the price-to-book ratio.

The adjustment aims to account for companies’ spending on research and development and other internally developed assets, which, under conventional accounting rules, are typically expensed rather than recognized as assets on the balance sheet. Critics argue that this makes intellectual property–intensive companies appear overvalued, potentially resulting in these companies being excluded from value stock indices.

S&P is not the only index provider considering rule adjustments. FTSE Russell is also reconsidering its 50-50 division between growth and value stocks in its benchmark indices, as technology giants continue to increase their dominance in the market. The consultation will end on December 11.