SpaceX Isn't Joining the S&P 500 Right Away. Why That's Good News for the Market

The SpaceX IPO is just days away, and it won't be long before it gets added to many index funds, giving investors exposure to the new stock even if they don't buy it. The Nasdaq recently made changes that could result in the stock being added to the Nasdaq-100 after just 15 trading days.

But don't expect SpaceX to join the S&P 500 (SNPINDEX: ^GSPC) nearly as quickly. It may not be until after a year that it's eligible, and even then, it may not be a sure thing given the company's lack of profitability. For the overall stock market, this could be good news. Here's why.

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Adding more risk to the S&P 500 isn't what the market needs right now

The S&P 500 index is already looking fairly expensive, and adding SpaceX to the mix might only raise further concerns about a bubble and the potential for a significant correction or crash being around the corner. The index is, after all, a gauge of how the overall market is doing.

Currently, the index is averaging a price-to-earnings (P/E) multiple of nearly 26, which is fairly high. Meanwhile, the longer-term Shiller P/E ratio is at around 42, which is the highest it's been since the dot-com crash.

Adding SpaceX to the mix would only make the S&P 500 look even riskier, and it could have led many investors to divest from index funds tracking it in order to reduce risk. However, even without SpaceX, there are still concerns that the broad index may be due for a decline due to its exposure to heavily valued tech stocks.

^SPX data by YCharts

Investors should tread carefully give the uncertainty in the economy

Inflation is creeping up, oil prices remain high, the conflict in the Middle East remains ongoing, and consumer sentiment is at an all-time low. On top of all that, valuations in the stock market are exceedingly high. Those are just some of the reasons why it's crucial for investors to consider taking measures to reduce risk right now. SpaceX and other new IPOs may be enticing and exciting, but they can also make for incredibly risky investments. Buying them at a time when there's already so much uncertainty in the market can be a recipe for disaster.

While you may not necessarily want to get out of the market, now may be a good time to consider buying more value stocks or dividend stocks. Tracking the S&P 500 through index funds can still be a good option over the long term as well, but it may not be as safe as it once was, given how expensive the index has become.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.