Business · News 61
S&P Dow Jones Indices is changing how it classifies US stocks as growth or value, dropping share price momentum from its growth assessment and adding free cash flow to its value assessment. The changes will affect indices such as the S&P 500 Growth and S&P 500 Value, along with corresponding indices tracking mid-cap and small-cap stocks. According to an S&P Dow Jones Indices release dated October 23, the revised rules will take effect on December 21, 2026, as part of its annual index reconstitution.
Under the current rules, S&P Dow Jones Indices assesses growth stocks using three factors: the change in earnings per share over three years relative to the current share price, three-year sales per share growth and share price momentum over 12 months. Under the new rules, it will drop the momentum factor and use the other two measures to assess growth stocks. The changes to the value framework are more extensive.
S&P Dow Jones Indices will replace the traditional book value-to-price ratio with an adjusted measure that accounts for intangible assets. Changes to S&P's growth and value factors Factor Before After Growth 1. Three-Year Net Change in Earnings per Share (Excluding Extra Items) over Current Price2.
Three-Year Sales per Share Growth Rate3. Momentum (12-Month % Price Change) 1. Three-Year Net Change in Earnings per Share (Excluding Extra Items) over Current Price2.
Three-Year Sales per Share Growth Rate Value 1. Book Value to Price Ratio2. Earnings to Price Ratio (trailing) 3.
Sales to Price Ratio 1. Intangibles-adjusted Book Value to Price2. Earnings to Price Ratio (trailing) + Forward One-Year Earnings to Price Ratio (simple average blend of the two factors)3.
Sales to Price Ratio4. Free Cash Flow to Price Ratio S&P Dow Jones release - October 23 It will also combine trailing earnings-to-price with forward one-year earnings-to-price, using a simple average of the two. The sales-to-price ratio will remain, while free cash flow-to-price will be added as a new factor.
Free cash flow is the cash a company generates after accounting for capital spending. By adding this measure, the index provider will use another way to assess a company's value relative to its share price. However, the new free cash flow measure will not apply to real estate, banks, insurance and certain financial services industries.
These sectors and industries will be assessed using the other value factors. Clients will first see the changes in preliminary index files from December 4, before the revised indices take effect ahead of the market opening on December 21. Tags Home / Market News / S&P set to change how it classifies US growth and value stocks
Source: CNBC TV18
