The S&P 500 Explained: What Every Investor Should Know

What Is the S&P 500?

The S&P 500 is a stock market index that tracks the performance of 500 large companies listed on U.S. stock exchanges. When people talk about "the market" being up or down, they often mean this index.

Created in 1957 by Standard & Poor's, the index is weighted by market capitalization. This means larger companies have more influence on the index's movement than smaller ones.

How Companies Get Into the S&P 500

Not just any company can join the S&P 500. A committee at S&P Dow Jones Indices selects members based on several criteria:

Market capitalization must exceed $18 billion. The company must be based in the United States. It must have positive earnings in the most recent quarter and over the past four quarters combined. The stock must have adequate liquidity and a reasonable share price.

When a company no longer meets these criteria or gets acquired, it leaves the index. The committee then selects a replacement.

Why Market Cap Weighting Matters

The S&P 500 uses market capitalization weighting. A company's weight in the index equals its market value divided by the total market value of all 500 companies.

Currently, the largest companies by weight are technology giants. The top ten holdings alone represent roughly 35 percent of the entire index. This concentration has both benefits and risks.

When these large companies perform well, they pull the entire index higher. When they struggle, the index can decline even if most of the other 490 companies are doing fine.

Historical Performance

Since its inception, the S&P 500 has returned approximately 10 percent annually on average, including dividends. However, this long-term average masks significant year-to-year variation.

The index gained 17.9 percent in 2025, marking its third consecutive year of double-digit returns. Goldman Sachs projects a 12 percent total return for 2026, while other forecasts range from 3.7 to nearly 17 percent.

Historically, when the S&P 500 has gained 15 percent or more in a year, the following year averages about 8 percent returns, according to LPL Financial research.

Investing in the S&P 500

You cannot buy the S&P 500 directly, but you can invest in funds that track it. Index funds and ETFs that follow the S&P 500 are among the most popular investment vehicles in the world.

These funds charge very low fees, often under 0.1 percent annually, and provide instant diversification across 500 companies. Many investors use S&P 500 index funds as the core of their retirement portfolios.

Understanding the Risks

While the S&P 500 provides diversification across many companies, it is still 100 percent U.S. stocks. It does not include international companies, bonds, real estate, or other asset classes.

The index can lose significant value in bear markets. It dropped nearly 20 percent in April 2025 following tariff announcements before recovering. During the 2008 financial crisis, it lost over 50 percent from peak to trough.

For long-term investors, these drawdowns have historically been temporary. The index has eventually recovered and reached new highs. But investors need to be prepared emotionally and financially to hold through these periods.