Passive trackers do not need to rebalance in response to price changes when full replication is used, at least for market-cap weighted indices (I know there are also indices which are not exactly market-cap weighted and rebalance a few times per year, and of course some trading is required when the composition changes).

I think the relevant mispricing introduced by passive investing is the relative one. The question is not that passive investors are driving the S&P 500 index higher than it should. The thing is that they are failing to distinguish company A, which should ouperform because it's doing well, from company B, which should underperform because it's not doing so well.