Tesla surge adds to dominance of S&P 500's biggest players

Tesla Inc extended its rally on Thursday ahead of its December debut in the S&P 500, with its market value nearing $500 billion, highlighting the growing domination of mega-cap growth stocks within Wall Street's main benchmark.

The California company's stock rose 2.6% and is up over 20% since S&P Dow Jones Indices announced on Monday it would add Tesla to the index as of Dec. 21, a change that will force index funds to buy around $50 billion of its stock.

The coronavirus pandemic has accelerated cloud computing, online shopping and other trends that have helped the largest U.S. companies, including Apple Inc, Microsoft Corp , Amazon.com Inc and Facebook Inc, extend their leads over smaller rivals, driving their shares higher and increasing their already-massive influence within stock indexes.

"The rapid changes in the economy have accelerated concentration at the top," said S&P Dow Jones Indices analyst Howard Silverblatt. "These companies prospered and grew even bigger, so we now have these haves and have-nots."

Up about 500% in 2020, Tesla has become the most valuable auto company in the world, by far, despite production that is a fraction of rivals such as Toyota Motor Corp, Volkswagen AG and General Motors Co.

"Tesla is emblematic of a business that has changed dramatically because of technology," said Tom Martin, senior portfolio manager at Globalt Investments in Atlanta, which owns shares of Tesla.

Now worth $470 billion, Tesla will increase the concentration of heavyweight companies within the S&P 500. It will be the seventh-most valuable company within the index, just behind Berkshire Hathaway and ahead of Visa Inc, according to Refinitiv data. At its current value, Tesla is about five times more valuable than GM and Ford Motor Co combined.

Still, today's domination of Wall Street by a handful of companies is not unique. Apple, Microsoft, Amazon and Apple now make up about 20% of the S&P 500. In 1976, IBM, AT&T Inc , Exxon and GM accounted for the same proportion of the index, according to data from S&P Dow Jones Indices.

Volume in Tesla call options has also climbed this week. The buying spree and subsequent hedging from dealers could drive up Tesla shares further when November options expire on Friday, said Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group.

About a fifth of Tesla's shares are closely held by Chief Executive Elon Musk and other insiders, and since the S&P 500 is weighted by the amount of companies' shares actually available on the stock market, Tesla's influence within the benchmark will be slightly diminished, putting it in eighth place, just behind Johnson & Johnson, and equivalent to just over 1% of the index.

Traders skeptical of Tesla's rally have made it Wall Street's most shorted stock, and those short sellers are down a combined $4 billion in four days, according to financial technology and analytics firm S3 Partners.

Surging Big Tech stocks have played a major part in the S&P 500's bull markets in recent years, and investors continue favoring them even as some worry that a potential turn away from their high valuations could hurt the broader market.

"These companies are where all the growth is. But I'm sure eventually we will see new entrants that will create value and represent a headwind to some of these businesses," Martin said.