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The S&P 500 large-cap stock index undergoes quarterly rebalances to reflect evolving market conditions. Managed by S&P Dow Jones Indices, the process involves evaluating companies based on criteria like market capitalization, liquidity, profitability, and sector representation. Additions and deletions ensure the index captures the top 500 performers, with changes announced after market close and effective before trading opens on the specified date.
This week, the committee revealed its latest adjustments that will take effect on Dec. 22. Among the moves, Carvana (NYSE:CVNA) will be one of three companies joining the index, an inclusion that caps a stunning turnaround: its shares have nearly doubled in 2025 and surged more than 5,000% over the past three years, pushing its market cap to nearly $87 billion.
This transformation positions the online used car dealer as a mainstream heavyweight, a remarkable shift from its roots as a niche disruptor.
Carvana’s trajectory has been wild. In late 2022, amid a post-pandemic inventory glut and rising interest rates, the online used-car retailer teetered on bankruptcy. Shares plummeted below $4 — penny stock territory — erasing billions in market value and prompting debt restructuring talks. Three years later, Carvana has overhauled its operations and showcases a leaner model.
Key to its rebound have been aggressive cost cuts, including workforce reductions and facility consolidations, which flipped adjusted EBITDA positive by mid-2023. Vehicle sales hit record highs in 2025, up 43% year-over-year, thanks to an enhanced e-commerce platform and next-day delivery in over 300 markets.
Partnerships, like offloading used rentals from Hertz (NASDAQ:HTZ), bolstered its inventory flow, while analysts credit a “better business model” than peers like CarMax (NYSE:KMX). Wedbush Securities just upgraded Carvana’s stock from neutral to outperform and raised its price target to $400 per share on improved profitability margins.
It’s true Carvana rode the meme stock wave in 2021 — and continues to do so — that at various times has created a retail buying frenzy, but index inclusion demands more substance. S&P criteria emphasize sustained earnings and liquidity; Carvana’s third-quarter net income of $263 million (up 78% from last year) on $5.6 billion in revenue met the bar, proving the meme hype evolved into real growth.
S&P 500 inclusion typically triggers the “index effect,” where mutual funds and exchange-traded funds (ETFs) must buy shares to mirror the benchmark. Funds like Vanguard S&P 500 ETF (NYSEARCA:VOO) and SPDR S&P 500 ETF Trust (NYSEARCA:SPY) alone hold over $1 trillion in assets. This passive influx often spikes prices 5% to 10% after addition.
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Historically, though, the tailwind fades fast. Studies show additions average 7.5% gains in the announcement week but deliver modest long-term outperformance — around 2% to 3% excess returns in the first year, according to S&P Dow Jones data from 2010 to 2020. Some, like CrowdStrike (NASDAQ:CRWD) in 2024, sustained momentum due to fundamentals, while others reverted to market norms.
For Carvana, the buying pressure could add $5 billion to $10 billion in liquidity, but sustained gains hinge on execution, not just ETF flows.
Inclusion offers Carvana a credibility halo and fresh capital, but it does face risks. Its subprime loan portfolio — key to financing sales — is growing amid record late payments, which hit 6.65% in Q3, according to Fitch Ratings. Delinquencies could spike with economic headwinds, eroding Carvana’s margins.
Its ties to Cerberus Capital Management and DriveTime Automotive — the private, used-car dealership Carvana’s uses as a loan and warranty processor — remain opaque. Carvana sold $800 million in loans in 2024 to a suspected Cerberus-linked trust, undisclosed as related-party despite director Dan Quayle’s role there. DriveTime is run by CEO Ernie Garcia III’s father, a relationship that has, former insiders allege, inflated Carvana’s revenue through “generous” reimbursements.
Additional pressure comes from insiders — including Garcia — dumping $18 million in shares in November 2025 alone. There haven’t been any stock purchases in years.
I’ve been wrong on Carvana’s trajectory for a while as the stock defied my crash predictions and surged past my skepticism. That’s why I avoid shorting: markets can stay irrational longer than you can stay solvent, as economist John Maynard Keynes quipped. Yet reckonings do finally come.
Entry into the S&P 500 might inflate the bubble, but mounting defaults, hidden deals, heavy debt, and insider sales signal cracks in the foundation. Investors would be wise to tread carefully, using any upside momentum from the index addition as an opportunity to take profits.
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