Damodaran Warns: High-Value Tech Giants Like SpaceX Could Raise Risks For Index Investors

Indian retail investors have increasingly turned to US-focused index funds to diversify their portfolios. However, Aswath Damodaran, a renowned professor at NYU often called the 'Dean of Valuation,' has issued a cautionary note regarding the future of the world’s most famous stock index, the S&P 500. He warns that the rush to include newly listed giants like SpaceX, OpenAI, and Anthropic could fundamentally alter the risk profile of passive investing.

The Trillion-Dollar Dilemma

Traditionally, the S&P 500 has been seen as a basket of stable, profitable, and well-established American companies. However, the next generation of market leaders—firms involved in space exploration and artificial intelligence—are reaching massive valuations long before they achieve financial stability. If these companies, some valued at hundreds of billions or even trillions of dollars (approx. ₹84 lakh crore and above), are fast-tracked into the index, they could bring significant volatility with them.

Damodaran argues that while these firms might quickly become some of the largest companies by market capitalization, they often suffer from three major issues during their early years as public entities:

• Persistent Losses: Many of these high-growth firms prioritize expansion over profit, meaning they could be loss-making for years.
• Untested Business Models: Companies like OpenAI and Anthropic are operating in the rapidly evolving AI sector, where long-term sustainability is not yet guaranteed.
• Governance Concerns: Newly public firms often have complex management structures that may not prioritize minority shareholder rights as much as established 'Blue Chip' companies do.

What This Means for Passive Investing

For an Indian investor holding an S&P 500 ETF or Index Fund, 'passive investing' means your money is automatically invested in the companies that make up the index. If the index rules are relaxed to include these volatile giants shortly after they go public, your 'safe' index fund might start behaving more like a risky venture capital fund.

Damodaran’s warning suggests that the S&P 500 could shift from being a gauge of the broader US economy to a concentrated bet on high-risk technology. For retail investors in India, who often use US indices to hedge against the volatility of the domestic market, this shift could mean that their 'safe' international exposure is no longer as stable as it once was.

The Outlook for Indian Portfolios

As the 'trillion-dollar fight' for index inclusion heats up, investors should be aware that the S&P 500 is not a static product. If firms like SpaceX or OpenAI enter the index while still in their 'experimental' phases, the diversification benefits that Indian investors seek may be diluted. Keeping an eye on index inclusion criteria will be vital for those who want to avoid accidental exposure to high-stakes corporate gambles.

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