S&P Rewrites Stock Classification Rules! $375 Billion in Funds May Be Forced to Rebalance; Growth Stocks and Value Stocks Face a "Major Shakeup"

S&P Dow Jones Indices' new stock classification rules will trigger a reshuffle between growth and value stocks. According to a statement released by the index provider on Friday, S&P will incorporate intangible assets, expected earnings and free cash flow into its metric system for judging whether a company is cheap relative to its share price. At the same time, the 12-month price momentum measure of a company's growth potential will be removed. The new rules follow a recently completed consultation and will take effect at the annual index rebalance before market open on December 21. Value stocks' long-term underperformance has prompted the index provider to rethink its rules The adjustment may force funds tracking the affected indices to adjust holdings to match the new index constituents. Bloomberg Intelligence analyst James Seyffart estimates that at least $375 billion in passive funds are linked to the affected indices. S&P's decision stems from a long-running debate over whether traditional value metrics remain valid. Researchers and fund managers argue that part of the reason for value stocks' prolonged slump is that the relevant metrics are flawed, especially price-to-book. The adjustment aims to account for corporate spending on R&D and other internally developed assets, which under standard accounting rules are often expensed rather than recorded as assets on the balance sheet. Critics say this makes IP-intensive companies look expensive and can thus keep them out of value indices. S&P is not the only index provider considering rule changes. FTSE Russell is also reconsidering its 50/50 growth/value split in its benchmark indices, citing the growing market dominance of tech giants. That consultation closes on December 11.