Reddit Is Getting Added to the S&P 500 — But You Still Shouldn’t Buy It

Index additions have become one of the most reliable short-term catalysts in the stock market. When a company is added to the S&P 500, every fund that tracks the index — passively managing trillions of dollars — has no choice but to buy shares, regardless of valuation. That forced buying creates a predictable pop. 

But predictable pops and durable investments are two different things, and conflating them is how investors end up holding an expensive stock for the wrong reasons. Reddit‘s (NYSE:RDDT | RDDT Price Prediction) index-inclusion rally is a textbook example worth studying before you chase it.

The Mechanical Pop, Explained

Reddit shares are climbing roughly 14% in midday trading today after S&P Dow Jones Indices announced Thursday that the company will join the S&P 500 later this month, taking the spot vacated by AvalonBay Communities (NYSE:AVB), which is being acquired by Equity Residential Properties Trust (NYSE:EQR). That’s a mechanical reaction, not a verdict on Reddit’s business.

Here’s why the move is so pronounced. JPMorgan estimates that index funds tracking the S&P 500 will need to purchase roughly 16.7 million Reddit shares to match its new index weighting. Reddit’s average daily trading volume since its March 2024 IPO has run around 5.98 million shares. That means forced buyers need to absorb nearly three times a typical day’s volume, concentrated around the rebalancing date. When demand outpaces float that dramatically, price gaps higher — that’s supply and demand, not a change in fundamentals.

History Says the Euphoria Fades

Typically, after the confetti settles, stocks added to the index gain an average of 7.5% during the announcement week, according to S&P Dow Jones data covering additions from 2010 through 2020. That lines up neatly with what Reddit is doing right now. But the same data shows those gains mostly don’t compound. Over the following year, newly added stocks delivered only about 2% to 3% of excess return relative to the broader index — a fraction of the initial pop.

In short, the index bid is real, but it’s temporary. Once the forced buyers finish buying, the stock trades on its own merits again. And that’s where Reddit’s story gets more complicated.

The Business Underneath the Rally

Reddit’s most recent quarterly results showed why index euphoria and business quality can diverge. Global daily active unique users grew 18% year over year, but the composition of that growth is the concerning part. 

Logged-in users — the ones who post, comment, and build the habits advertisers pay for — grew just 1%, down sharply from 12% growth a year earlier. Meanwhile, logged-out visitors, who are far less valuable to advertisers, expanded much faster. U.S. users, who generate roughly five times the revenue per user of international users, also saw growth decelerate.

The likely culprit: AI-powered search summaries, including those built on Reddit’s own licensing deal with Alphabet‘s (NASDAQ:GOOG) Google, are increasingly answering user questions without sending anyone to Reddit itself. Reddit gets paid for the data, but it may be losing the very engagement that makes its community — and its advertising business — valuable long-term. Management has also signaled it will stop breaking out logged-in versus logged-out user figures going forward, reducing the visibility investors have into this exact trend.

Key Takeaway

Regardless of where Reddit trades this week, the index-addition rally is a supply-and-demand event, not an endorsement of the underlying business. History from S&P Dow Jones’s own data says the bulk of the excess return has likely already happened, and what’s left, on average, is closer to 2% to 3% over the next year — not the kind of edge worth paying up for. 

Combine that with slowing logged-in engagement and a business model that may be quietly cannibalized by the AI tools it’s licensing its content to, and the case for buying into this pop gets thinner, not stronger. Sharp investors can let the index funds do their required buying and watch from the sidelines instead.

Contact [email protected] for any questions or corrections.