The indexeuro PX1 designates the ISIN code of the CAC 40 index, the flagship indicator of the Paris Stock Exchange. Behind this technical acronym lies a measurement tool that synthesizes the performance of the largest listed companies on Euronext Paris. Understanding how it works allows for better reading of market fluctuations and helps avoid common misinterpretations.
Free float capitalization and capping: the true engine of the PX1 calculation
You may have noticed that two companies of comparable size do not have the same weight in the CAC 40? This is due to the calculation method used, which does not rely on a company’s total market capitalization.
The indexeuro PX1 is a free float market capitalization weighted index. Only shares that are actually available for purchase on the market (the “free float”) are counted in the calculation. A company where the state or a founding family holds a majority stake will therefore have a lower weight, even if its total market value is very high.
To analyze the evolution of the indexeuro PX1, one must also consider a lesser-known rule: each stock is capped at 15% of the total weight of the index. This cap is applied at each quarterly revision by the Scientific Council of Indices, which meets in March, June, September, and December.
Between two revisions, prices move freely. In practice, a stock may temporarily exceed this limit before rebalancing brings it back below the threshold. This phenomenon was observed during the strong rise of the luxury sector when LVMH approached this cap.
Weight drift between two quarterly revisions: what the price does not reveal
Why does this calendar detail change your reading of the index? Because an index at a given moment does not necessarily reflect the “official” sector distribution.
Let’s take a simple example. Just after a September revision, the weights are recalibrated. If the energy sector progresses strongly in October, its share in the index mechanically increases. The PX1 index then overrepresents energy compared to its target weighting.
Reading the CAC 40 price without considering this drift is akin to confusing a photo of a team at the beginning of the season with its composition during a match. The number of points you see on your screen incorporates these temporary distortions.
Liquidity over twelve months and company selection
The Scientific Council of Indices does not only look at the size of companies. The selection of companies in the CAC 40 also relies on their liquidity measured over the last twelve months. A rarely traded stock, even with significant capitalization, may be excluded in favor of a more active stock.
This liquidity criterion explains why some large French groups are not included in the index and why the composition changes more often than one might think.
Interpreting point variations of the indexeuro PX1
When the CAC 40 gains or loses several hundred points in a session, the instinctive reaction is to think that all companies are rising or falling. This is almost never the case.
With a cap of 15% per stock, the five or six heaviest companies alone represent a considerable share of the index. A variation of a few percent on two or three heavyweight stocks is enough to visibly move the index, even if the majority of other stocks remain stable.
Here are the reflexes to adopt for a more nuanced reading:
- Check which stocks are driving the index up or down during a session, rather than reasoning about “the market” as a whole
- Compare the index’s performance with that of sector indices (banks, luxury, energy) to identify the real source of the movement
- Consult the date of the last quarterly revision to know if the current weights still reflect the official distribution
Raw CAC 40 and CAC 40 reinvested dividends
The indexeuro PX1 as displayed on most platforms corresponds to the raw CAC 40 (price return), meaning without the dividends paid by companies. When a company distributes a dividend, the price of its stock mechanically drops by the amount paid, which causes the index to decline.
To assess the actual performance of an investment in the Paris market, one must look at the “gross return” or “net return” version of the index, which reintegrates the dividends. The difference between the two versions widens over the years and can represent a significant gap over a decade.
Common errors in reading the CAC 40 price
Some interpretations recur regularly and deserve correction:
- Believing that the index reflects “the French economy” when a large part of the revenue of CAC 40 companies is generated outside France
- Directly comparing the point level of the CAC 40 with that of other indices (Dow Jones, DAX) without considering the different calculation methods
- Ignoring the concentration effect: a few stocks weigh much more than others, making the index sensitive to movements of a small number of stocks
- Forgetting that the raw CAC 40 underestimates actual profitability since it excludes dividends from the calculation
Following the indexeuro PX1 with these points in mind helps avoid the most common shortcuts. The next time the CAC 40 shows a spectacular variation, first look at which stocks are moving and what their actual weight in the index is before drawing a conclusion about the trend of the Paris market.
