Shares of Reddit (NYSE:RDDT) surged 12.5% in premarket trading on Friday after S&P Dow Jones Indices announced the social media platform will join the S&P 500 index. The stock was trading at $177.85, building on a 3% gain from the previous session. This move comes as the broader market remains closed, but premarket activity points to strong investor enthusiasm.
The inclusion is set to trigger significant mechanical buying from index-tracking funds. J.P. Morgan estimates that these funds could need to acquire approximately 16.7 million shares of Reddit, which translates to a notional value of $2.97 billion. This figure represents 2.79 times Reddit's average daily volume of 5.98 million shares since its IPO in March 2024, and amounts to about 9.8% of the company's market capitalization as of Thursday's close of $30.42 billion. The projected purchase is also 12.6 times the $235 million Reddit spent on share buybacks in the second quarter.
Reddit's inclusion in the S&P 500 comes as part of a reshuffling that will see AvalonBay Communities (NYSE:AVB) removed from the index. AvalonBay is merging with Equity Residential (NYSE:EQR) to form Vivmark Residential, and the combined entity will remain in the index. The change will take effect before trading opens on August 18, leaving index funds with just one trading day to adjust their portfolios before the inclusion becomes effective.
The compressed timeline means that passive funds are likely to execute their purchases near the close of trading on August 17, while active managers may act sooner. This could lead to heightened volatility in Reddit's stock price as the effective date approaches. Traders should monitor Tuesday's opening volume and closing auction for signs of whether the buying pressure has been fully priced in.
Reddit's latest earnings report underscores its strong operational performance. For the second quarter, the company reported revenue of $805 million, a 61% increase year-over-year. Net income nearly tripled to $253 million, while adjusted EBITDA surged 106% to $343 million. Free cash flow more than doubled to $261 million. Daily active unique users grew 18% to 130.3 million, and global average revenue per user (ARPU) rose 36% to $6.18.
Chief Executive Steve Huffman highlighted the growing value of real human perspective in an AI-driven world, as advertising revenue climbed 64% and international revenue jumped 84%, outpacing U.S. growth. The company forecasts third-quarter revenue in the range of $860 million to $870 million and adjusted EBITDA between $385 million and $395 million, reflecting continued momentum.
Wall Street remains optimistic about Reddit's prospects, with an average price target of $218.32 from 23 analysts, implying a 22.8% upside from the premarket price of $177.85. Ratings are predominantly positive, with 14 buys, 9 holds, and no sells. Notable targets include $300 from Needham and $270 from B. Riley Securities, though J.P. Morgan has a hold rating with a $185 target.
Despite the recent surge, Reddit shares have faced significant headwinds in 2026, having dropped over 31% year-to-date and remaining more than 42% below their September peak. The company has cited inconsistent search-engine referrals as a key operational challenge, which affected U.S. user growth in the second quarter. The current rally reflects optimism about index demand and ongoing improvements in monetization, but risks remain.
Historical patterns suggest that newly added S&P 500 stocks often underperform the index by about 2% in the three months following inclusion, according to Stephens analyst Melissa Roberts. Additionally, any further decline in search referrals could act as an operational catalyst. Investors should be cautious about chasing the stock at these levels, as the mechanical buying pressure may subside once index funds complete their rebalancing.
