Goldman Speculates on the Impact Tesla (TSLA) Will Have on the S&P500 Index

December 17, 2020 7:23 AM EST
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Goldman Sachs Chief Equity Strategist, David Kostin, offered insights on the impact adding Tesla (NASDAQ: TSLA) to the S&P will have on the overall index. Since shares have risen by 657% this year, outperforming the S&P 500, if it had been a constituent all year, it would have lifted the total index return by roughly 200 bp, from 16% to 18%. Additionally, because Tesla currently trades at 170 times consensus 2021 earnings with a $600 billion market cap and will join the index with a weight of ~1.5%, many investors are concerned that the company’s inclusion will lift the index’s 22x P/E multiple by two turns or more. Since this is close to the highest levels on record, this level of increase could make the market appear overvalued.

The analyst is not concerned with this however stating "The S&P 500 P/E multiple is generally calculated as total constituent market cap divided by total constituent earnings. Both metrics are adjusted for each company in proportion to the free float of shares, as determined by S&P. Mathematically, this calculation is equivalent to an earnings-weighted average of constituent P/E multiples, rather than a market cap-weighted average, because earnings is in the denominator of the ratio. Although Tesla will hold a 1.5% market cap weight in the index, based on consensus 2021 estimates its earnings will represent just 0.2% of the S&P 500 total".

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Goldman Sachs, Standard & Poor's, Tesla, Earnings