S&P revamps growth and value definitions

S&P Dow Jones Indices is changing the way US stocks are classified as growth or value, revising the methodology that underpins major style benchmarks including the S&P 500 Growth and S&P 500 Value indexes, as well as related mid- and small-cap indices. The updated framework will take effect before the market opens on December 21, 2026, as part of the annual index reconstitution, with clients seeing preliminary index files from December 4.

The redefinition is expected to shift some companies between growth and value categories and will require portfolio changes for passive funds and exchange-traded funds that track these style indices. At least $375 billion in passive fund assets are linked to the affected benchmarks, meaning the new rules will have broad reach across institutional and retail investment products that follow S&P style indices.

Under the current approach, S&P Dow Jones Indices evaluates growth stocks using three factors: the three-year net change in earnings per share over the current price, the three-year sales per share growth rate, and 12‑month share price momentum. Under the new rules, the momentum factor will be removed, leaving the earnings and sales growth measures as the sole inputs for growth classification.

This adjustment focuses the growth definition more squarely on fundamental metrics tied to companies’ earnings and revenue trajectories relative to their share prices, rather than recent price performance. The change is designed to refine how growth characteristics are captured within the S&P style index family without altering the overall purpose of the growth benchmarks.

The changes to the value style framework are more extensive. The traditional book value-to-price ratio will be replaced by an intangibles-adjusted book value-to-price measure that incorporates intangible assets into the calculation. In addition, the earnings-to-price factor will now blend trailing earnings-to-price with forward one-year earnings-to-price using a simple average, while the sales-to-price ratio remains part of the model.

A new free cash flow-to-price ratio will also be introduced as a value factor, adding a measure of the cash a company generates after capital spending relative to its share price. This free cash flow measure will not apply to real estate, banks, insurance and certain financial services industries, which will continue to be evaluated using the other value metrics without the free cash flow component.

The methodology shift will force passive funds and ETFs tied to S&P growth and value indexes to rebalance holdings as the index constituents are updated. This rebalancing will, in turn, reshape sector weightings within the growth and value indexes as companies move between styles or see their style scores adjusted under the new factors.

For institutional investors with mandates linked directly to S&P style benchmarks, the revised rules will require a detailed portfolio review to maintain alignment with the updated indexes and control tracking error. While the number of companies changing classification has not been specified, the structural nature of the rule changes means the new definitions will guide future rebalances on the established index schedule.