S&P Dow Jones Adjusts Value and Growth Factor Framework and Eliminates Price Momentum
S&P Dow Jones Indices announced an update to the growth and value factor framework of the S&P U.S. Style Indices, incorporating adjusted book value of intangible assets, expected earnings, and free cash flow into the assessment of value stocks.
The value factor has been adjusted from the original book value to price ratio, trailing earnings to price ratio, and sales to price ratio, to the adjusted book value to price ratio of intangible assets, a simple average of trailing and one-year expected earnings to price ratios, sales to price ratio, and free cash flow to price ratio.
The growth factor has eliminated the price momentum indicator from the past 12 months, retaining only the net change in earnings per share over three years and sales growth over three years.
The new rules, confirmed after consulting market participants, will take effect at the annual rebalancing in December 2026, specifically before the market opens on December 21.
Bloomberg Intelligence analyst James Seyffart estimates that at least $375 billion in passive funds track the affected indices and will need to adjust their holdings accordingly during the rebalancing.
Passive funds will need to "buy" newly included value components and "sell" those that are removed according to the new classifications, which is a rule-driven mechanical adjustment. Companies with high intangible assets may benefit from the expansion of the value basket, while traditional companies with low book value but strong cash flow may face pressure from capital inflows.
Source: Public Information
ABAB AI Insight
The S&P Style Indices have long defined value using traditional metrics like book value to price ratios, which previously led to the systematic exclusion of tech companies due to their inability to capture R&D, branding, and other intangible assets. This adjustment formally incorporates adjusted book value and free cash flow, continuing the industry's long-standing discussion on the ineffectiveness of the value factor.
In terms of capital flow, passive products tracking the relevant style indices must mechanically buy and sell around the rebalancing date to match the new components. The $375 billion scale means that some companies with high intangible assets or high free cash flow will receive forced buying, while companies that previously relied on momentum may be reclassified.
This aligns with previous adjustments to the Russell style indices and academic research on the value of intangible assets, indicating a current phase of index rule iteration dominated by passive capital, transitioning the value basket from traditional tangible assets to knowledge economy adaptations.
Essentially, this represents a shift in pricing power: index providers redefine factors, shifting the market's judgment of "cheap" from book value to cash and intangible assets, forcing passive capital to reallocate according to new rules rather than simply following price signals.
ABAB News · Cognitive Law
- Index rules changed, passive capital immediately reallocated
- The inclusion of intangible assets in the definition of value makes tech stocks cheap again
- Eliminating momentum cuts off the self-reinforcing channel of price trends.