This is a big week for the stock market, with the SpaceX IPO expected to start trading on Friday. Morningstar equity research has been digging into the Elon Musk company’s financials, and has already published an overview of its prospects and valuation.
In this week’s Markets Brief, we look at the latest on SpaceX’s inclusion in indexes and what that means for both active and passive funds. We also check in on what ails financial stocks. Plus, we offer a high-level preview of the Consumer Price Index, which has risen in importance after Friday’s stock market swoon, sparked by concerns about higher interest rates after a stronger-than-expected jobs report.
Financials In the Red. Is AI to Blame?
Financial stocks had their best day in over a year last Thursday, with a 2.6% gain in the Morningstar US Financial Services Index. Why highlight this in the middle of a bull market? While attention has been focused on the strong rallies in AI and energy stocks, a whole swath of the financial sector has been posting big losses this year.
Mastercard MA is down 15.0% this year, Visa V is down 8.0%, Wells Fargo WFC has fallen 11.5%, and Capital One Financial COF has dropped 24.0%. Critically, another big chunk of the financial sector is doing just fine. Lifted by the continued bull market, Goldman Sachs GS and Morgan Stanley MS are up more than 24%, and long-time laggard Citigroup C is up 17%. Altogether, the US Financial Services Index is down 4% this year, against the overall stock market’s gain of 11%.
The puzzle is that, on balance, the economy is doing fine, and at this point, there don’t seem to be major red flags for credit quality. That’s even considering the so-called K-shaped economy, wherein middle- and lower-income consumers are feeling the strain of inflation while higher earners benefit from the bull market in stocks.
Take American Express AXP, which is down roughly 17% this year. Michael Miller, who covers the company for Morningstar, notes the company is generally not exposed to credit quality issues among lower- and middle-income consumers.
So why the decline? “There’s no clear smoking gun,” Miller says, but he points to a few likely concerns. First, coming into 2026, many financials were overvalued. “The market was really treating most of these names like there was no credit or economic risk to speak of, which is just not the case,” he explains. “Beyond that, I have seen these names respond negatively to concerns that the labor market could see pressure from AI disruption—not 100% unreasonable—or from agentic payments disrupting card networks—which I’m really skeptical of.”
Sean Dunlop, who heads up financial sector coverage, says another aspect of the AI threat appears to be weighing on these stocks: “A lot of financial services sectors are ‘advice-driven,’ so if you’re bullish on AI and expect the cost of knowledge to decline precipitously, financial services are probably not where you’d want to hide. This would be why sectors as diverse as commercial real estate brokerage, wealth management, financial data, and insurance brokerage have been hit.”
Miller adds, “To lend some credence to the AI narrative, the best-performing consumer finance name by far is Bread Financial Holdings, and they have the worst credit quality in my coverage.” Bread BFH is up 23% this year.
What’s ahead for financials? This past week, Christopher Verrone, chief market strategist at Strategas, looked at the progonises from a technical perspective. “Historically, when financials are among the worst sectors year to date through May, one of two things happens—either recession or crisis follows (1990, 2007, 2008, 2011), or they big league play catch up in the second half (2014, 2016, 2017, 2020, 2023),” he writes.
SpaceX: Where You’ll Own it, Where You Won’t
While some investors may have SpaceX headline fatigue, there’s a good reason for all the attention on the IPO beyond it being an Elon Musk company. With a $1.75 trillion valuation and a record $75 billion to be raised, SpaceX will find its way into many index funds within a week of launching, much sooner than with most IPOs.
But one key distinction should be made: Just because the overall valuation and IPO are so big, that doesn’t mean SpaceX’s size will drive how much of an investment your index fund has.
Take the biggest stock fund in the world, the $2.3 trillion Vanguard Total Stock Market Index VTI, which tracks the CRSP US Total Market Index. (Morningstar recently acquired CRSP). As Morningstar Indexes explained in a recent report, at the expected valuation for SpaceX, the company is just 0.12% of the index. Contrast that with Broadcom AVGO, valued at $1.9 trillion, which has a 2.9% weighting in the index, and Meta Platforms META, which carries a $1.6 trillion market cap and a 1.9% weighting. Put another way, despite its gigantic valuation, SpaceX will carry roughly the same portfolio weighting as smaller companies like General Dynamics GD and Ciena CIEN, both of which have market caps of less than $100 billion.
In addition, another widely held set of funds won’t be including SpaceX anytime soon. On Thursday, S&P Dow Jones Indices announced it won’t make any changes to the rules for including stocks in the S&P 500 that would allow SpaceX immediate entry to the index. That means another of the most widely held funds, the $1.7 trillion Vanguard S&P 500 ETF VOO, will be SpaceX-free for the foreseeable future.
Another less-discussed impact of SpaceX’s inclusion in indexes such as CRSP or those from FTSE Russell is that active managers who measure their performance against those benchmarks will have to decide whether to own the stock. Even for a fund manager benchmarked against the CRSP US Large Cap Index would only have to measure up with a 0.13% position, the pressure may be on to own the stock.
“Many managers who don’t want to own it will end up buying it to hedge,” says Adam Sabban, who follows actively managed US stock funds for Morningstar. The stock will “probably be more acute for growth funds, since it will be a larger weighting in those indexes. Many managers were scarred by not owning Tesla and have elected not to go without an Elon stock.”
CPI on Deck – Watching for Spreading Inflation
Friday’s stronger-than-expected jobs report saw bond traders raise expectations for a Federal Reserve interest rate increase this year, even as wage pressures remain subdued. But the real issue is energy-driven inflation. Economists will be paying close attention to this week’s CPI report to see if there are any signs of inflation spreading beyond gas prices. Forecasts call for the CPI to come in at a 4.3% annual rate in May, and for the CPI excluding food and energy to rise at a 2.9% rate.
