CRH will join the S&P 500 on December 22nd, a milestone that has been met with evident enthusiasm.
Davy’s Colin Sheridan said index inclusion could generate “demand for circa 17 per cent of outstanding shares”, saying the announcement should “catalyse a further re-rating – and outperformance – relative to peers”.
Goodbody’s Shane Carberry was similarly upbeat, hailing the “wider investor attention from being part of the S&P 500 index”.
Investors, too, were cheered, with shares jumping 6 per cent following the announcement. The logic is intuitive enough: once a company enters the world’s most-tracked equity benchmark, every fund that tracks the index must buy its shares.
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Liquidity deepens, attention rises and – in theory – the share price follows. However, investors may want to temper the enthusiasm. Much research suggests the so-called index effect has largely evaporated.
A 2024 Harvard study found the average abnormal return for new S&P 500 entrants has shrunk from 7.4 per cent in the 1990s to less than 1 per cent in the past decade.
A separate McKinsey analysis of hundreds of index changes comes to the same conclusion: prices typically revert to intrinsic value within weeks, and the boost rarely lasts beyond two months. The effect is fading, “as investors increasingly anchor on business fundamentals”.
Indeed, some research suggests that firms deleted from the index go on to outperform companies added to it. By the time a company is promoted, it has usually already enjoyed a long stretch of outperformance, setting the scene for eventual mean reversion.
CRH shares – up 35 per cent this year and more than threefold over five – arguably fit that pattern.
In short, inclusion often produces a short-term share price pop, as it did for CRH, but no more. After that, fundamentals take over.
