2026-08-14

Reddit (RDDT) Stock Jumps 11% on S&P 500 Inclusion - Two Weeks After a 21% Crash Over Google AI Traffic Fears

Written & reviewed by the TradeSmrt editorial team · 2026-08-14

In this article

What Happened
Why Index Inclusion Moves Stocks - Even Without Any Change in the Business
The Google Traffic Risk Hasn't Gone Anywhere
What to Take Away From This
FAQ
Sources

What Happened

Shares of Reddit (NYSE: RDDT) jumped more than 11% in after-hours trading Thursday, August 13, after S&P Dow Jones Indices announced the company will join the S&P 500 index before the market opens on Tuesday, August 18. The stock carried that momentum into Friday's regular session, briefly trading above $175. Reddit is replacing AvalonBay Communities (AVB) in the index, and the reason AvalonBay is leaving has nothing to do with weak performance - the real-estate investment trust is being absorbed by fellow S&P 500 member Equity Residential (EQR) in a merger of equals, which opens up a seat in the index. With this addition, Reddit becomes only the second social media company in the S&P 500, joining Meta Platforms.

What makes this move worth a closer look is the context around it. Just two weeks earlier, on July 31, Reddit reported second-quarter revenue of $805 million, up 61% year over year, beating Wall Street's estimates on revenue, profit, and forward guidance. Despite that, the stock fell 21% in a single session. The trigger was one line buried in the company's investor letter: "Search referrals were choppy in the quarter, and traffic was more volatile later in the quarter." That was a reference to Google's Gemini-powered AI Overviews, which increasingly answer search queries directly at the top of the results page instead of sending users through to sites like Reddit. CEO Steve Huffman later pushed back publicly, arguing that AI Overviews "can't replace 10 blue links," but the comment did little to calm concerns about a business model that leans heavily on search-driven traffic for ad revenue.

In other words, the same stock fell 21% two weeks ago on fears that AI is eating into its traffic, then jumped 11%-plus on a completely unrelated mechanism: passive funds being forced to buy the stock. Placed side by side, these two events offer a clean illustration of how index inclusion actually moves a stock price, and why that's a fundamentally different kind of catalyst than an earnings-driven selloff.

Why Index Inclusion Moves Stocks - Even Without Any Change in the Business

Joining the S&P 500 doesn't change a company's revenue or earnings on its own. The reason the stock still moves is mechanical demand. Trillions of dollars globally sit in funds and ETFs - SPY, VOO, and IVV among the largest - built to replicate the S&P 500 exactly. Those funds are required by their own mandates to hold each index constituent at its index weight, so when a new name is added, they must buy a fixed amount of stock by a fixed date, regardless of what any individual portfolio manager thinks about the company. Actively managed funds benchmarked against the S&P 500 often pile in too, to avoid running underweight versus the index. Academic finance calls this the "index inclusion effect," and it's been documented for decades: stocks tend to see abnormal gains between the announcement date and the actual effective date of inclusion, as this pre-positioning buying plays out.

In Reddit's case, there are roughly four trading days between Thursday's announcement and the Tuesday effective date - the exact window in which index funds prepare their rebalancing trades. Demand tends to concentrate especially close to the effective date's closing price, since index funds try to minimize tracking error by buying as near as possible to the price the index provider uses to calculate weights. It's worth stressing, though, that this demand is a one-time, technical event that has nothing to do with the company's actual earning power. Academic studies also show that a meaningful share of these inclusion-driven gains tends to unwind gradually over the weeks and months following the effective date. Index inclusion creates real, verifiable buying pressure - it just isn't necessarily permanent.

The Google Traffic Risk Hasn't Gone Anywhere

The more important question for investors is whether Reddit's underlying business actually improved. The honest answer is: not really. The concerns about declining search referral traffic from Google's AI Overviews weren't resolved by this week's index news - they simply got pushed out of the headlines for a few days. There is a mitigating detail, though: DA Davidson, which maintains a Buy rating and $200 price target, has pointed out that the roughly $60 million a year Reddit collects from Google under a data-licensing deal (Google pays to use Reddit's data for AI training) is a small slice of Reddit's projected 2026 revenue. That distinction matters - Reddit's relationship with Google actually cuts two separate ways, one a real headwind (falling search referral traffic) and one a real tailwind (steady licensing revenue), and they shouldn't be lumped into a single "Google risk" narrative.

Seen that way, the two moves in Reddit stock over the past two weeks are not contradictory signals about the same underlying story - they're two different forces that happened to land close together in time. The July 31 drop reflected a genuine fundamental worry about the durability of Reddit's ad-driven traffic. This week's pop reflects index mechanics that have nothing to do with that worry. Reading the rebound as evidence the Google traffic concern has been resolved would be a mistake; the next quarterly report's referral-traffic commentary is a far more meaningful signal for where this stock goes next than this week's index-driven bounce.

What to Take Away From This

An index-inclusion rally is mechanical demand, not a change in fundamentals. It reflects mandatory buying from index funds and benchmark-tracking active managers, not a revised earnings outlook. A meaningful portion of these gains has historically unwound in the weeks and months after the effective date.
The same stock can move sharply for opposite reasons within weeks. Reddit fell 21% on fundamental concerns, then rose over 11% on technical fund flows. Without tracking why a stock moved each time, it's easy to mistake a technical bounce for a sign that an earlier risk has been resolved.
Getting removed from an index doesn't always mean poor performance. AvalonBay lost its S&P 500 seat because of a merger with a fellow constituent, not weak results. When reading index-change news, check whether the driver is a fundamental issue or a structural event like M&A.
A single risk factor, like AI search competition, often has more than one side. Reddit's relationship with Google includes both a real headwind (referral traffic) and a real tailwind (licensing revenue). Rather than reading a single risk narrative off a headline, check how each revenue stream actually contributes to the total.

FAQ

Why did Reddit stock jump over 11%?

S&P Dow Jones Indices announced after Thursday's close that Reddit will join the S&P 500 on August 18, replacing AvalonBay Communities. Index funds and ETFs that track the S&P 500 are required to buy the stock to match its index weight, which typically drives strong buying pressure between the announcement and the effective date.

Why did the same stock fall 21% just two weeks earlier?

On July 31, Reddit beat estimates on revenue, profit, and guidance for the second quarter, but the stock still dropped 21% after the company disclosed that search referral traffic had become "choppy" and "more volatile" later in the quarter - a reference to declining traffic from Google's AI Overviews.

Why is AvalonBay being removed from the S&P 500?

Not because of weak performance. AvalonBay is being absorbed into fellow S&P 500 member Equity Residential through a merger of equals, which ends its standalone listing and opens a seat in the index.

How long do index-inclusion stock gains typically last?

It varies by case, but research and historical examples show that a meaningful share of the abnormal gains around an inclusion event tends to fade over the following weeks or months. Because inclusion doesn't change a company's earnings outlook, fundamentals - not index mechanics - tend to reassert themselves as the primary driver of the stock once the rebalancing trades are complete.

Sources

This article is an original synthesis and analysis based on the reporting below, not a reproduction of the original articles. Please check the source articles directly for the most current figures.

⚠️ This article is for informational purposes only and is not investment advice. Market conditions change constantly - always verify the latest data before making investment decisions.