(Bloomberg) -- Tesla's (NASDAQ:TSLA) entry into the S&P 500 Index next week won’t make the U.S. benchmark as expensive as investors might expect, Goldman Sachs says.
Although the electric carmaker’s eye-watering rally has pushed its shares near 170 times the consensus 2021 earnings estimate, its addition will only have a minimal impact on the benchmark’s valuations because of a nuance in index metric calculations, confounding the “instinctive conclusion” of many investors, Goldman strategists led by David J. Kostin wrote in a Dec. 16 note.
Tesla shares have surged 644% this year, pushing the company’s market value close to $600 billion, of which about 80% is floating. And although S&P 500 constituents are weighted according to their free float cap, index metrics conventionally treat the benchmark as an aggregate of its individual constituents rather than a cap-weighted average, according to Goldman.
“Given Tesla’s large size and elevated multiple, many investors erroneously intuit that the company’s inclusion into the S&P 500 will lift the index’s current 22x P/E multiple -- which already registers close to the highest levels on record -- by two multiple turns or more,” Kostin and his colleagues wrote. Instead, “it will lift the index P/E ratio by just 0.4 multiple turns.”
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