Despite a Surge of Over 200% This Year, the Retail Trading Giant Will Not Enter the Flagship Index – Stock Reacts with Sharp Declines

Robinhood Markets (Ticker: HOOD), which has delivered phenomenal returns over the past year, fell by about 5.8% today after the company was left out of the new additions to the S&P 500 index. The decision, published as part of S&P Global’s June index rebalancing, surprised many on Wall Street – especially after Robinhood’s stock hit an all-time high last Friday, driven by analyst forecasts from major banks such as Barclays and Bank of America.

Robinhood, a retail trading platform for individual investors, recorded an impressive 201% increase over the past year, according to Google Finance, surpassing $70 per share – more than tripling from its June 2024 low of approximately $23. Despite these strong results, the company remains outside the prestigious index.

Expectations vs. Reality: The Market Reacts Sharply

Expectations for Robinhood’s inclusion in the index were based on several factors: a market cap reaching $62 billion, growing profitability (with a P/E ratio around 40), and high daily trading volume. However, S&P’s selection committee was apparently not convinced. It’s important to note that inclusion in the S&P 500 requires meeting several criteria, including four consecutive quarters of profitability, high liquidity, and qualification as a U.S. “Large-Cap” stock.

While Robinhood met some of these requirements, additional – and sometimes opaque – considerations may have delayed its entry. Possible reasons include a history of high volatility, regulatory concerns, or a concentrated ownership structure.

Market Reaction: AppLovin Stock Also Drops

AppLovin (Ticker: APP), another leading candidate for inclusion, also fell by about 4.1% after being excluded. According to reports, a short-selling firm called Fuzzy Panda Research sent a letter to S&P alleging that AppLovin is a “house of cards” violating the rules of Google and Apple’s app stores. This pressure may have influenced the decision-makers.

Why Does Index Inclusion Matter?

Inclusion in the S&P 500 is more than a status symbol; it is a powerful investment engine. Stocks in the index are automatically purchased by ETFs and mutual funds tracking the S&P 500, which leads to increased demand, higher liquidity, and often short-term outperformance.

Consequently, disappointment over exclusion can trigger a negative market reaction – as was evident today.

Looking Ahead: Potential Remains

Despite the daily decline, Robinhood’s stock is still trading significantly above its level at the start of 2024. The rally has been supported by surging user numbers, improved profitability, and expansion into new areas such as crypto trading and the launch of IRA services.

If Robinhood continues to strengthen its financial performance and solidify its position, it may be added in future S&P 500 quarterly rebalancing updates. Until then, the company will have to navigate increased volatility and heightened media attention, which is not always favorable.