S&P, short for Standard & Poor's, is one of the world's most influential providers of financial market intelligence. Think of it as a giant financial data and analytics company. For most investors, S&P is synonymous with two key things: its world-famous stock market indices and its widely recognized credit ratings. The company’s most famous creation, the S&P 500 index, is so dominant that when you hear a news anchor say “the market was up today,” they are almost certainly referring to it. This index serves as a primary benchmark for the health of the U.S. stock market and the performance of countless investment funds. Beyond indices, S&P is also one of the “Big Three” credit rating agencies, alongside Moody's and Fitch Ratings, providing crucial assessments on the financial stability of companies and governments across the globe.
While the name is singular, S&P's business is multifaceted. It's helpful to break down its main activities to understand its impact on your investment world.
This is the part of the business that acts like a financial report card issuer. S&P Global Ratings analyzes the financial health of a company or a government and assigns it a credit rating. This rating, typically on a scale from 'AAA' (the best, rock-solid) down to 'D' (default), is simply an opinion on the borrower's ability to pay back its debt. A high rating means S&P believes there's a very low risk of default, making it easier and cheaper for that entity to borrow money. For investors, especially those in bonds, these ratings are a critical first-look filter for assessing risk.
This is the division that most equity investors interact with, even if they don't realize it. It creates, maintains, and licenses a vast family of stock market indices that are used as benchmarks and the basis for many investment products like index funds and ETFs.
This is the heavyweight champion of stock market indices. The S&P 500 tracks the performance of 500 of the largest and most established public companies in the United States, from Apple to ExxonMobil. It's a “market-capitalization-weighted” index, which is a fancy way of saying that the biggest companies (by market capitalization) have the biggest impact on the index's value. Because it represents about 80% of the entire U.S. stock market's value, it's considered the best single gauge of large-cap U.S. equities.
For a follower of value investing, S&P is not just background noise; it's a crucial part of the investment landscape. A smart investor knows how to use S&P's tools without blindly following them.
The primary role of the S&P 500 for a value investor is to serve as a benchmark. The goal of carefully selecting individual, undervalued stocks is to achieve better returns than the overall market. Over the long term, if your hand-picked portfolio isn't outperforming a simple, low-cost S&P 500 index fund, it begs the question: why are you going to all the extra trouble? Even Warren Buffett has famously advised that most people who don't have the time to research individual companies are best served by simply buying and holding a low-cost S&P 500 index fund. Your job is to prove you can do better.
S&P's credit ratings can be a useful, though not definitive, starting point for your own research.
The S&P 500 represents the consensus—it's what the “market” is doing. Value investors, by definition, are contrarians who believe the market's consensus is sometimes wrong. By understanding what's in the index and which companies are driving its performance, you can better identify areas that are over-loved (and thus overpriced) or under-loved (and thus potentially cheap).
Standard & Poor's is a pillar of the modern financial world. For the average investor, its most important contributions are the S&P 500 index and its credit ratings. The savvy value investor views the S&P 500 as the score to beat and uses S&P's ratings as one of many tools in their analytical toolbox. S&P provides the map and the compass, but it's up to you to navigate the journey and find the hidden treasure.