- The sharp rise in mega-cap tech stocks has forced the Nasdaq 100 to conduct a "special rebalance" of the index.
- The top seven stocks in the index make up more than 50% of the index, with Apple and Microsoft alone making up about 25%.
- These are the potential winners and losers of the Nasdaq 100 rebalance, according to Wells Fargo.
The surge in mega-cap tech stocks this year has helped push the concentration of the Nasdaq 100 index to its limits, and now a shake-up is about to happen.
Nasdaq said its popular Nasdaq 100 index would undergo a "special rebalance" later this month. That comes as the "magnificent seven" tech stocks now make up more than 50% of the index.
According to the methodology of the Nasdaq 100, a special rebalance may be conducted at anytime based on weighting restrictions "if it is determined to be necessary to maintain the integrity of the index."
Apple and Microsoft alone represent about 25% of the index as they each hover around a $3 trillion valuation. Their strong stock rallies this year helped push the Nasdaq 100 up nearly 40% in the first half of 2023. The rally took place as the market recovers from its 2022 bear market and as investors set their focus on the potential for artificial intelligence.
The seven mega-cap stocks that are likely set to see a reduction in their Nasdaq 100 weights include Apple, Microsoft, Nvidia, Amazon, Tesla, Meta Platforms, and Alphabet.
The rebalance will be effective prior to the market open on Monday, July 24, and it will not result in the removal or addition of any stocks in the index.
Nasdaq announced the index shake-up late Friday after the market close. On Monday, investors sold the mega-cap tech stocks down as much as 2% in anticipation of the reweighting. Meanwhile, some stocks gained on the expectation that what's mega-cap tech stocks' pain will be their gain.
According to Wells Fargo equity analyst Chris Harvey, potential winners of the index shake-up that could see an increased allocation include Starbucks, Mondelez, Booking Holdings, Gilead Sciences, Intuitive Surgical, Analog Devices, and Automatic Data Processing.
The 2023 rebalance announcement was "driven by Tesla's week-ago rally, causing the constituents weighting > 4.5% to exceed 48% of the index. Their collective weight will be down-sized to 40%," Harvey said in a recent note, adding that the biggest losers will be Apple and Microsoft, which should see their weight fall by almost 2% each.
The Nasdaq 100 shake-up shouldn't end the ongoing rally in technology stocks, according to Harvey.
"We believe this liquidity event dents, but does not break, the longer-term uber-cap trend... as long as the economy remains in a malaise (i.e. not a recession), rather optimistic valuation premiums and growth estimates are difficult to refute," he said.