Nasdaq sheds 10% in three days in tech sell-off; Tesla tanks after S&P 500 snub

The Dow Jones industrial average shed 632.42 points, or 2.3%, to close at 27,500.89. The Standard & Poor's 500 index dropped 95.12 points, or 2.8%, to settle at 3,331.84, while the tech-heavy Nasdaq tumbled 465.44 points, or 4.1%, to end at 10,847.69.

After an uptick that analysts say is atypical of September, U.S. markets plummeted Thursday and Friday, dragged down by the tech giants ahead of the long holiday weekend. The markets were closed on Labor Day.

Big Tech lost big on Tuesday: Amazon gave up 4.4%, Facebook shed 4.1% and Google parent Alphabet fell 3.6%. Biotechnological firm Moderna, which is working on a coronavirus vaccine candidate, lost nearly 13.2%. 

(Amazon chief executive Jeff Bezos owns The Washington Post.) 

Investors also are grappling with questions about U.S.-China trade, stymied coronavirus relief talks and growing worries about the November election, said Michael Farr, president of Farr, Miller & Washington. "Each of these factors could imperil the narrative that has been baked into stock prices, which is a relatively quick economic rebound." 

Tesla shares plunged 21.1% Tuesday after the S&P 500, in a surprise move, passed on the carmaker. Investors in the high-flying electric car company had been banking on Tesla joining the benchmark index - its share price has been rising all summer. And the company's stock has rocketed more than 350% from the beginning of the year.

In Tesla, which has garnered a passionate fan base, akin to a consumer electronics company or a comic book media property, many longtime investors see an industry-defining pioneer, whose vision for an all-electric future has forced larger, more established automakers to play catch up. The company boosted its prospects on Wall Street further by posting earnings of more than $100 million in July, its fourth consecutive quarter of profitability, a first for Tesla.

Optimistic investors continued to pour money into the company, sending its market capitalization above corporate giants such as Home Depot and Intel. And in another summer milestone, Tesla surpassed the market value of Toyota, seizing the crown of the most valuable carmaker in the world, despite selling fewer than 400,000 vehicles last year, compared with Toyota's 10.74 million.

But investors' hopes were dashed when S&P Dow Jones Indices, the company that oversees the S&P 500, announced late Friday that it would not add Tesla to its widely tracked index. Instead, the e-commerce site Etsy, tech maker Teradyne and pharmaceutical company Catalent, will join the S&P 500 effective Sept. 21. The index will delete tax preparation company H&R Block, department store chain Kohl's and beauty brand Coty. The planned reorganization comes eight days after a major shake-up with the Dow, which dumped Exxon, Pfizer and Raytheon for Amgen, Honeywell and Salesforce.

Adding Tesla had been "viewed as almost a consensus move based on all the metrics that Tesla was likely to get into the S&P 500 club this time around," Dan Ives, an analyst at Wedbush Securities said in a note to clients after the S&P's decision. Its omission "thus will have a negative knee jerk investor reaction." 

Ives said Tesla's profitability and earnings forecast were likely the deciding factors for excluding the company. But the snub for Tesla boosters was confounding. "In a nutshell Tesla not getting into the S&P 500 will be a head scratcher to the bulls that viewed this as virtually a lock given all the parameters met," he said.

"The market was undoubtedly surprised by the S&P 500 Index Committee's decision not to include Tesla this quarter, despite announcing its fourth quarter of profitability and solidifying its eligibility for inclusion," said Nicole Tanenbaum of Chequers Financial Management. But the committee that makes the selections may have been focused on more than simply meeting the bottom line criteria, she said. Tesla's reliance on selling regulatory pollution credits to boost its profits and the uncertainty around its earnings stream may have weighed on the decision to leave the company out of the index, she added.

In 2019, more than $11.2 trillion in assets were benchmarked to the S&P 500, according to an estimate from S&P Dow Jones Indices. A special S&P committee determines which companies populate the index based on a variety of factors, but meeting the necessary criteria does not guarantee inclusion. S&P said in a news release Friday that it was also changing the lineup to its mid- and small-cap indexes.

As for the three companies that did make the list, Tanenbaum said there's an arguable logic behind their additions. "Despite the companies smaller sizes, each has delivered a consistent track record of profitability," she said. The three companies that were deleted from the S&P 500 will drop down into the lower capitalization index, the S&P MidCap 400.