S&P 500: Everything You Need to Know About the U.S. Index

The S&P 500 index is a global benchmark for U.S. stocks, calculated and managed by S&P Dow Jones Indices, comprising the stocks of the 500 largest U.S. companies by market capitalization. The index aims to provide a comprehensive picture of the U.S. economy's performance and is considered a fundamental benchmark for tracking the health of financial markets. The index is based on the market capitalization of free-floating shares, meaning that each company's weight is related to its share of the total market capitalization available for trading, not just the number of shares. This composition gives larger companies—such as Apple, Microsoft, and Amazon—a higher weight in the index calculation, meaning that their price movements have a greater impact on the overall level of the S&P 500.

The composition is reviewed periodically, with companies added or removed based on specific criteria related to market capitalization, liquidity, and ownership distribution. The index is also used as a performance benchmark by fund managers, individual investors, and pension funds, and serves as a reference for many financial products such as exchange-traded funds and global investment funds.

The S&P 500 index was launched in 1957 by Standard & Poor’s as the first broad-based U.S. index based on market capitalization. Initially, the index aimed to provide a more comprehensive alternative to traditional indices like the Dow Jones Industrial Average, which includes only 30 companies. Over the decades, the index has evolved to become a fundamental standard used to compare the performance of investment funds and financial markets in general.

Throughout the past decades, the index has reflected shifts in the U.S. economy, from traditional industries to the technology revolution of the 1990s, and now to digital and artificial intelligence companies. The index has also witnessed global financial crises, such as the 2008 crisis and the COVID-19 pandemic in 2020, demonstrating resilience and the ability to recover and grow. This long history has solidified the S&P 500's position as the most closely monitored index by international investors and an indispensable source of data for financial analysis.

The S&P 500 index is calculated by summing the market capitalization of all the constituent companies, then dividing the result by a fixed factor known as the Index Divisor to adjust the numbers and facilitate comparisons over time. Market capitalization is based on the stock price multiplied by the number of shares available to the public (not all shares).

The periodic adjustment of the index ensures the inclusion of new active companies and the exclusion of those that no longer meet the criteria. This methodology gives the index a high capacity to dynamically and realistically represent the U.S. economy. It is worth noting that the index is not significantly affected by movements in smaller companies, as larger companies with greater weight play the primary role in its fluctuations. Regarding cash distributions, the index calculates total return when assessing historical performance, including reinvested distributions.

The S&P 500 index consists of 500 major companies representing most sectors of the U.S. economy. The index is classified according to the Global Industry Classification Standard (GICS) and includes sectors such as: Information Technology (25-30%), Financials (11-12%), Healthcare (12-13%), Consumer Discretionary and Staples, Communication Services, Industrials, Energy, Utilities, Materials, and Real Estate.

Currently, the key companies constituting the index include Apple, Microsoft, Amazon, Alphabet (Google), Meta (formerly Facebook), Tesla, Johnson & Johnson, Visa, JPMorgan Chase, and others. These companies play a pivotal role in the index's movement, especially the technology sector, which has been the main driver of performance in recent years. Periodic reviews are conducted to add or exclude companies based on performance and market capitalization, maintaining the index's relevance and realism in representing the U.S. economy.

The S&P 500 index exhibited strong performance in 2024, achieving an annual return of 23.31%, one of the highest rates recorded in years. The index continued its growth in the first half of 2025, rising by 5.50% since the beginning of the year, with a notable increase of 4.96% in June alone. The combined market capitalization of the index's companies reached a record level of $52.501 trillion by mid-2025.

These gains are attributed to several factors, including improved earnings from major companies, sustained demand in technology and artificial intelligence sectors, and expectations of U.S. interest rate cuts. This performance showcases the index's attractiveness to investors worldwide and reflects market confidence in the resilience of the U.S. economy despite global challenges.

Although the S&P 500 is limited to U.S. companies, it has an indirect impact on the Saudi financial market (Tadawul). This is due to the close interconnection between global markets, where movements in the U.S. index influence investor sentiment and international capital flows, especially as the Saudi market opens up to foreign investments under Vision 2030.

For instance, a rise in the S&P 500 often accompanies a wave of global optimism that drives Saudi stock prices higher, and vice versa. Additionally, oil prices—which are a primary driver of the Saudi economy—affect U.S. companies in the index, particularly in the energy sector. Saudi investors also compare the performance of their local companies, such as Hail Cement (symbol 3001), with global companies in the index to assess opportunities and risks.

The cement sector represents one of the core sectors in the Saudi market, with Hail Cement Company (3001) being a prominent example. In contrast, the S&P 500 includes leading U.S. companies in the building materials sector, such as Martin Marietta and Vulcan Materials, but they represent a relatively small percentage of the index's weight compared to the technology or financial sectors.

Cement companies in both Saudi Arabia and the U.S. are affected by the same global factors such as construction demand, energy prices, and raw material costs. However, Saudi companies are often directly impacted by oil prices and local government policies, while their U.S. counterparts are influenced by general economic changes in the United States. Monitoring the performance of the S&P 500 allows Saudi investors to understand the global context that may indirectly affect their local companies.

The S&P 500 is characterized by the diversity of its sectors, but some sectors play a larger role in determining the index's direction. In recent years, the Information Technology sector has been the main driver, with companies like Apple, Microsoft, and Nvidia contributing significantly to pushing the index to record levels. This sector constitutes about 25-30% of the index's weight, making it the most influential.

Other impactful sectors include Financials (JPMorgan, Visa), Healthcare (Johnson & Johnson, UnitedHealth), Consumer Discretionary and Staples (Amazon, Procter & Gamble), and Communication Services (Alphabet, Meta). Conversely, sectors like Energy and Industrials play a relatively smaller role in the index but may take center stage during certain periods depending on global prices or geopolitical events.

The U.S. market features several major indices used as benchmarks for comparison with the S&P 500. Among the most notable are:
- Dow Jones Industrial Average (DJIA): Comprising 30 major companies using price weighting.
- NASDAQ 100: Focusing on technology companies listed on NASDAQ, serving as a technology sector index.
- Russell 2000: Reflecting the performance of small-cap companies in the U.S. market.
- Global indices such as FTSE 100 (UK), DAX (Germany), Nikkei (Japan), MSCI World.
- The Saudi market index (Tadawul - TASI): Despite differences in composition, there is a connection in global influences.

These indices are used to assess relative market performance and help investors build diversified portfolios or monitor sectoral and geographical trends.

In 2024 and the first half of 2025, several economic developments directly impacted the S&P 500, including:
- A slowdown in inflation in the United States, supporting the index's rise.
- Continued tightening policies from the U.S. Federal Reserve, with expectations of upcoming easing.
- Strong results from major companies, especially in the technology sector, boosting investor confidence.
- Fluctuations in oil prices and their impact on energy and industrial sectors.
- Geopolitical events such as the Russia-Ukraine war or slowing growth in China, leading to changes in global risk appetite.
- Activity in mergers and acquisitions, along with innovations in artificial intelligence and digital technologies.
All these factors have made the S&P 500 a true mirror of global economic changes and a sensitive index to any major developments.

The average dividend yield in the S&P 500 is estimated at around 1.5% annually by the end of 2024, reflecting the trend of major U.S. companies towards reinvesting profits rather than high cash distributions. The price-to-earnings (P/E) ratio was around 19-22 in mid-2024, indicating relatively high valuations compared to historical averages.

These values reflect investor confidence in the continued growth of corporate earnings, but they may sometimes indicate increased risk levels if valuations rise excessively. Monitoring these indicators is essential for analyzing financial and economic conditions, especially when making investment decisions in global markets.

The S&P 500 index cannot be traded directly in the Saudi market (Tadawul), but it is accessible to investors through several means:
- Investing in exchange-traded funds (ETFs) like SPY or VOO through international brokers.
- Opening investment accounts with local brokerage firms that provide access to U.S. markets.
- Investing in global investment funds or pension funds linked to the index's performance.
- Monitoring the index's performance as a benchmark for assessing market or investment portfolio performance.

It is important to ensure compliance with the regulations of the Saudi financial market when investing abroad, and it is always advisable to consult a licensed financial advisor before making any investment decision.

The performance of the S&P 500 is associated with several economic and financial risks that investors need to be aware of, including:
- Fluctuations in U.S. interest rates and the impact of Federal Reserve decisions.
- Global economic crises such as recessions or high inflation.
- Geopolitical events and pandemics that may affect investor confidence and capital flows.
- High stock valuations (P/E) that may indicate the potential for corrections.
- The strong interconnection between markets: any shock in global markets may quickly transfer to the U.S. index.

Therefore, it is always recommended to diversify investment portfolios and not rely solely on one index, while continuously monitoring economic variables.

The S&P 500 is used as a benchmark in the global asset management industry. Investment funds, pension funds, and index funds rely on it to evaluate performance, and it is used to determine expected risk and return ratios. Both individual and professional investors compare their portfolio performance against the index's results to assess the effectiveness of their strategies.

Additionally, the index provides a vast database for analyzing sectoral and geographical trends, helping to understand the dynamics of the global economy. However, investors should be aware that the index reflects only the U.S. economy and may not fully represent the opportunities or risks of other markets.