Currently, the top seven companies in terms of market value account for 55% of the weight in the NASDAQ Composite Index. After the adjustment, this will decrease to below 40%. At that time, funds tracking the NASDAQ Composite Index will sell stocks of companies with reduced weight. On Monday, most of the stocks of these seven companies experienced a decline.
To address the issue of excessive concentration of the largest component stocks, the NASDAQ Composite Index will undergo an adjustment later this month.
On the evening of July 7th local time, the NASDAQ Composite Index announced a "special rebalance" of the NASDAQ Composite Index 100 (referred to as "NASDAQ Composite Index" for short) to address the problem of excessive concentration in the index by reallocating weights.
This adjustment will be based on the list of outstanding shares as of July 3rd. The specific adjustment plan will be announced on July 14th and will take effect after the market closes on July 21st, before the market opens on July 24th. The changes in the index will force investment funds tracking the index to adjust their portfolios and sell stocks of companies whose weights have decreased in the index.
The NASDAQ Composite Index is usually reconstructed in December each year, with additional rebalancing opportunities each quarter. The NASDAQ Composite Index exchange stated in a statement:
"Special rebalancing can be conducted at any time if it is deemed necessary to maintain the integrity of the index."
Since its inception, the NASDAQ Composite Index has only undergone two special adjustments, in December 1998 and May 2011, respectively. According to the rebalancing rules, if the combined weight of the largest few companies (with a weight of 4.5% or more in the index) exceeds 48%, the NASDAQ Composite Index will adjust the weights of the index until their total weight in the index does not exceed 40%.
So far this year, the NASDAQ Composite Index has risen by 38%, but this increase is mainly driven by the seven largest weighted stocks: Microsoft, Apple, Alphabet, NVIDIA, Amazon, Meta, and Tesla.
Due to the methodology of the NASDAQ Composite Index, which is adjusted and confirmed based on market capitalization, market capitalization is one of the major factors affecting the weights.
As of July 7th, these seven companies accounted for 55% of the weight of the NASDAQ Composite Index. Among them, Microsoft has the highest weight at 12.9%, followed by Apple (12.5%), Alphabet (7.4%), NVIDIA (7%), Amazon (6.9%), Tesla (4.5%), and Meta (4.3%). The excessive concentration of weights has masked the lackluster performance of most stocks in the overall NASDAQ Composite Index, causing concern among some analysts and investors.
Previously, Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley and one of Wall Street's largest bearish analysts, warned that the victory of a "few giant stocks" was overshadowing broader market pain:
Significant repricing has occurred... dominated by low-quality, cyclical, and small-cap stocks.
Alex Cabrol, Managing Director of Tobam, a French asset management company, said that similar situations in the past have led to severe downturns:
This makes no sense.
The unraveling of this phenomenon is not a question of "if," but "when."
Following the announcement of the weight rebalancing, most of the "Seven Sisters" companies in the NASDAQ Composite Index experienced declines on Monday. Amazon and Alphabet fell over 2%, while Apple, Microsoft, and Tesla fell over 1%. NVIDIA dropped 0.8%, with only Meta showing an increase.