Growth, value stocks set for reshuffle as S&P adopts new rules

Growth and value stocks are set for a significant overhaul as S&P Dow Jones Indices adopts new rules to reclassify equities. The index provider will introduce intangible assets, forward earnings, and free cash flow as factors to determine whether a company's share price is undervalued. Simultaneously, 12-month price momentum will be removed as a criterion for assessing a company's growth potential.

These changes come after a recent consultation and will commence at the annual reconstitution before the market opens on December 21. Analyst James Seyffart from Bloomberg Intelligence estimated that the modifications could force at least $375 billion worth of passive funds to revise their holdings to align with the new constituents.

S&P's decision follows a prolonged debate about the relevance of conventional value measures, with critics arguing that flaws in the metrics, particularly the price-to-book ratio, have contributed to value's long-term decline. The adjustment aims to factor in expenses like research and development that are traditionally considered as costs rather than assets on the balance sheet, which can make intellectual-property-heavy companies appear overvalued and exclude them from value indexes.