Macy's (M) In Peril: Will the S&P 500 See Retailers, Energy Stocks Dumped?

It's been a terrible few months for Macy's NYSE: M. Sure, the stock had a decent holiday turnout, and things were looking reasonably bright going into one of the normally slowest shopping periods of the year, the post-Christmas slump. But along came a little homewrecker known as COVID-19, and that sent things spiraling out of control all over. Retail stocks especially took it on the chin, and Macy's was no exception. In fact, things are so bad at Macy's right now that it's about to be delisted from the S&P 500, and it may not be the last.

The S&P 500 Has Standards, You Know

For those who remember our earlier coverage of Tesla NASDAQ: TSLA and its ambitions to be listed on the S&P 500, you'll remember that there are certain requirements to join. A market cap of $6.1 billion is the minimum to approach as of that report, and the stock price needs to be at least $1 per share. Additionally, the company needs to make half of its revenues in the US, and half of its fixed assets must be there as well. The company further needs to file a 10-K report annually, and at least half its stock must be available for purchase.

While Macy's actually has most of this, the problem is in market cap. Back in the middle of February, back before this whole coronavirus thing really was more than a Chinese problem, Macy's had a market cap that was right about where it needed to be: around $6 billion. Thanks to the coronavirus and the government-forced closure of many “nonessential” retail businesses, however, that number has been pared back almost 75%, down around $1.5 billion today.

Out of the Majors, Down to the Farm League

That's enough to not only throw it out of the S&P 500—which is set to take place Friday—but enough to push it past the mid-cap S&P 400 as well. No, the new target for Macy's is the S&P 600, which includes a range of small-cap stocks. This is especially poignant given that S&P Dow Jones Indices—the group which manages the S&P 500—noted in a statement that Macy's current market cap levels were “...more representative of the small-cap market space.”

Macy's replacement in the S&P 500, reports note, is set to be Carrier Global, hitting the exchange this Friday. Carrier Global was created after United Technologies NYSE: UTX spun the firm off ahead of its upcoming merger with Raytheon NYSE: RTN.

Is This Just the Beginning of a Destabilized S&P 500?

Bad enough this happens to Macy's, but reports suggest that this may not be the last time we hear of such a move. With retailers getting pummeled across virtually every end of the spectrum, from specialty to general, just about everyone who isn't selling groceries is taking the worst of this. It may actually reach a point where retailers are no longer considered large-cap companies, with a handful of exceptions.

Several retailers are in such straits; The Gap NYSE: GPS, Kohl's NYSE: KSS, and Nordstrom NYSE: JWN are all well below the S&P 500's rankings, weighing in around $2 billion. Further, it's not just retailers that are lagging on that front; several energy companies including Apache NYSE: APA and Marathon Oil NYSE: MRO are under the $2 billion mark. The recent reversals in oil prices certainly haven't helped matters.

Is It Time to Consider Mitigating Circumstances?

Admittedly, the S&P 500 is a private organization, and by even the most elementary rules of a free market, can rank things as they see fit. Yet in sticking so thoroughly to its rule set, it may be doing investors a greater disservice than some may think. Sure, the S&P 500 needs to reflect a certain breed of company, but with the recent changes in the market—changes that absolutely are no reflection on the businesses involved—it may be worthwhile to relax these rules a bit.

At least, there shouldn't be any movement out of the S&P 500 until after all this has finally died down; it's not like Macy's bungled its sales efforts, but rather that the government shut them down under penalty of law. This is beyond Macy's ability to control, and the same goes for all other retailers right now. The energy firms also had no control over declining oil prices seen recently.

Still, in the end, the S&P 500 holding true to its standards may be helpful for investors. After all, there's nothing saying that Macy's et al can't get back in, later on, once their market cap improves.