The S&P 500's next quarterly rebalance is set for June 7th, and Barclays (LON:BARC) analysts believe the next addition to the benchmark index may be Block Inc., a financial technology firm led by Jack Dorsey.
“SQ reached S&P 500 eligibility following 4Q23 earnings in February 2024 as: (a) Q4 had positive net income of $178M and (b) the sum of net income over the LTM ending 4Q23 was also positive at ~$125M,” Barclays analysts said in a Wednesday note.
The company’s positive net income of $472 million in the first quarter also contributed to that trend, they added.
Although the inclusion on June 7th is not guaranteed, Barclays believes that SQ stock “screens well.”
However, selection isn't guaranteed as S&P has discretionary criteria, including sector balance.
SQ, classified under "Financial Services" in the GICS Industry, could be chosen to address sector underweighting, analysts explained.
This decision considers market capitalization and the index’s alignment with broader market sectors, giving Block a potential edge due to its market position.
“We estimate Financial Services is the second most underweight industry category represented in the S&P 500 index currently (Software & Services being the most under-represented),” the analyst wrote.
“We believe this underrepresentation makes SQ, with its $45B market cap, a likely candidate for inclusion,” they continued.
Barclays highlights that mergers and acquisitions (M&A) could also provide an avenue for SQ to join the S&P 500 outside of the regular quarterly rebalancing. When an existing index member is removed due to M&A activity, it creates a vacancy that typically gets filled promptly.
This offers SQ a potential opportunity to be added before the next scheduled rebalancing on June 7th.
In terms of a potential post-inclusion share price impact, analysts said newly included S&P 500 stocks typically see a 7.7% jump in value leading up to the first trading day as a member of the index. However, this gain is often tempered by an average 1.0% decline in the four weeks that follow.