Shares of Tesla rose 11% before the bell on Tuesday, adding around $40 billion to the value of the electric carmaker and giving another boost to the fortune of billionaire Chief Executive Officer Elon Musk.
S&P Dow Jones Indices confirmed after markets closed on Monday that they would add the company to Wall Street's main index from Dec. 21, firing the starting gun on a major reorganization of investment funds that track the basket of stocks.
At $400 billion, Tesla's market capitalization is a hundred times that of the S&P's smaller companies, according to Refinitiv data, and potentially making it the biggest ever addition to the index.
S&P DJI said the addition of the car company would require investment funds indexed to the S&P 500 to sell about $51 billion worth of shares of current member companies so that their portfolios correctly reflect the index.
"Potentially one of the pushbacks on adding Tesla to the S&P was the elevated stock price," Credit Suisse analyst Dan Levy wrote in a note. "The stock's recent pullback provides better opportunity for index trackers to build positions."
Bolstered by a decade of stock market gains, the combined market capitalization of the S&P 500 now totals close to $32 trillion, and S&P DJI data at the start of this year showed investments indexed to it reached $4.6 trillion.
If the pre-market gains hold, Tesla's own value will top $440 billion, more than the S&P gained on Monday after news emerged of successful COVID-19 vaccine trial data from Moderna Inc.
The run-up to Tesla's addition next month may see more speculative buying.
In 1999, Yahoo surged 64% in five trading days between the announcement that it would be added to the index and its inclusion. Yahoo's market capitalization at the time was only $56 billion.
"The 12% move is probably a short squeeze more than anything else," said Mark Taylor, sales trader at Mirabaud Securities, London.
"I believe in letting the dust settle for a few days and see how things pan out in terms of how much tracker money has gone behind this."
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