S&P 500 replacement: Reddit joins, AvalonBay exits

What happened: Reddit Inc. (RDDT) will replace AvalonBay Communities Inc. (AVB) in the S&P 500 on August 18, following Equity Residential's (EQR) acquisition of AvalonBay. Reddit's stock surged 11% on the news, with JPMorgan estimating index funds will buy approximately 16.7 million shares to match the index's weighting. Historically, S&P 500 additions have seen average abnormal returns decline from 7.4% in the 1990s to less than 1% in the 2010s.

Market impact: The tech sector, particularly social media platforms, is positively affected as Reddit joins the prestigious index. This move is likely to attract significant passive investment, driving up Reddit's share price. Conversely, AvalonBay, now exiting the S&P 500, may see reduced institutional interest and potentially lower stock prices.

What to watch next: Reddit's earnings report on August 25 will provide insights into its growth prospects and justify its inclusion in the S&P 500. Additionally, monitor the completion of Equity Residential's acquisition of AvalonBay, which will reshape the real estate sector's representation in the index. Lastly, track Reddit's stock price and trading volume to gauge investor sentiment towards its S&P 500 inclusion.