Why do companies move in and out of the S&P 500?

Announcements that a company is “joining the S&P 500” are not uncommon and can happen quarterly or when companies grow, merge, go bankrupt or another event impacts their market capitalization. A good example of this occurred in June 2026, when it was announced that semiconductor company Marvell Technology and electronics manufacturer Flex would join the index on June 22, replacing Pool Corporation and The Campbell’s Company.

The fact that both Marvell and Flex are technology names reflects how central the tech sector – and the artificial intelligence (AI) buildout in particular – has become to the U.S. equity market. And this gets to the root of why companies move in and out of the S&P 500 in the first place: The index is designed to maintain a representative snapshot of the U.S. large-cap market, and doing that requires periodic changes. Here’s how the process works and what it means for investors.

What is the S&P 500, and who decides which companies it includes?

Generally regarded as one of the best single gauges of large-cap U.S. equities, the S&P 500 is a widely followed stock market index designed to represent large, leading U.S. companies. The S&P 500 is market-cap-weighted and includes around 500 index members spanning every major sector of the economy, including names like Alphabet, Amazon, Apple, Berkshire Hathaway and Microsoft.

While the S&P 500 is often mistaken for a purely size-based ranking of the 500 biggest U.S. companies, that’s not entirely correct. An index committee at S&P Dow Jones Indices determines membership eligibility according to a published set of criteria rather than relying on market rank alone. The committee has discretion over which companies are added and when, and a company can be large enough to qualify on size yet still be left out of the index.

Why does the S&P 500 add or remove companies?

A membership change is a fundamental-based decision meant to keep the S&P 500 representative of the large-cap U.S. market. When the index drifts from its target composition, the committee steps in to adjust.

Several types of events tend to trigger a change, with mergers and acquisitions being among the most common. When a company listed on the S&P 500 is acquired, it must be replaced. This is what happened in early February 2026, when Ciena was added to replace Dayforce following an acquisition.

Bankruptcies, major restructurings and spinoffs can also cause a company to be replaced. There are also instances when a company is removed simply because its market cap has shrunk and is no longer representative of the large-cap space. When this occurs, the company may move down to a more appropriate index like the S&P MidCap 400 or the S&P SmallCap 600. In June 2026, for example, Pool Corp. and Campbell’s were removed from the S&P 500 and added to the SmallCap 600.

And there is the S&P 500’s quarterly rebalancing – a scheduled update that can include reconstitution (adding and removing constituents) along with other index adjustments under the methodology. The S&P 500 reviews and rebalances its membership on a regular quarterly schedule: the third Friday of March, June, September and December. Changes are typically effective at the open of the next trading day.

However, changes driven by corporate actions like acquisitions can happen at any time – even outside the index’s quarterly rebalances – as in the case of Ciena’s removal from the index in February.

What criteria do companies generally need to meet to join the S&P 500?

For companies to be eligible for inclusion in the S&P 500, they generally need to satisfy size, profitability, liquidity and public float requirements. They also need to have a listing on a U.S. stock exchange, have shown positive earnings in their most recent quarter, have shown positive earnings over the sum of their four most recent consecutive quarters and have a significant portion of their shares available for public trading. As of June 2026, S&P 500 constituents must have a market cap of $22.7 billion or more.

It bears repeating that these criteria exist to keep the S&P 500 investable and reflective of the large, stable companies that define the U.S. large-cap market. The profitability requirement, in particular, is meant to ensure that a company has demonstrated sustained financial viability before it earns a place in the index.

Marvell’s move to the benchmark in June 2026 illustrates how these criteria work in practice. Indeed, the company had long been excluded despite its size because it didn’t meet the index’s cumulative profitability threshold; it qualified only once its earnings had strengthened alongside surging demand for AI data center chips.

The market-cap threshold can also change. Alongside index membership, the threshold is reviewed quarterly and updated as needed to reflect current market conditions. Any specific figure can therefore be verified against the latest S&P Dow Jones Indices methodology.

What happens to a stock when it’s added to or removed from the S&P 500?

Because trillions of dollars are invested in funds that track the S&P 500, a membership change can create a wave of trading activity. Mutual funds and ETFs that follow the benchmark need to buy shares of newly added companies and sell shares of those being removed, often around the effective date. That mechanical demand can lead to noticeable short-term price and volume moves.

An important caveat is that these effects tend to be short-lived. A stock’s long-term performance still depends on business fundamentals, not on its index membership. Inclusion follows each index’s published methodology – primarily regarding company size and eligibility rules – and is not a verdict on the quality or prospects of any business.

What can investors do with S&P 500 changes?

Since the S&P 500 is designed to evolve as the economy does, the index is often viewed as an overall indicator of U.S. economic performance. Therefore, periodic additions and removals are simply a normal part of the index’s maintenance process.

If you own a fund that tracks the S&P 500, any rebalancing is handled for you, and you automatically hold shares of the newly added companies in your fund. Despite this user-friendly feature, it’s wise to always review and understand your diversification and what you actually own. The experience of holding an index fund is very different from holding an individual stock that happens to be entering or leaving the index.

Investors may want to avoid chasing headlines, too, because the price reaction to an inclusion announcement is often driven by short-term, mechanical forces rather than long-term fundamentals.

The bottom line

The S&P 500 removes and adds companies to maintain a close representation of the large-cap U.S. market, ultimately replacing names that get acquired, restructure or shrink below the index’s requirements. A committee makes these calls using published criteria, so it’s not an automatic ranking of the 500 biggest companies. Some changes follow a set quarterly schedule, while others happen as corporate developments play out.

A change in index standing can move a stock in the short term as funds buy and sell shares to match the new construction, but it says little about the company’s long-term prospects. For investors, the prudent approach is to treat these changes as routine while staying focused on individual investment goals.

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