Bank of Richland expects that the companies with the largest weight reduction in this round will be Microsoft, Apple, NVIDIA, Amazon, and Alphabet-C. Starbucks, Mondelez International, Priceline, Gilead Sciences, and others may benefit from it.
On July 24th, the Nasdaq 100 Index will undergo a "special rebalance" to address the issue of excessive concentration in the index by redistributing weights.
This rebalancing specifically targets giant tech stocks, including Microsoft, Apple, Alphabet-C, NVIDIA, Amazon, Tesla, and Meta. With the support of these tech giants, the Nasdaq 100 has surged nearly 40% this year, far outperforming the 16% increase in the S&P 500.
Last week, Tesla's stock price soared, causing the combined weight of the constituent stocks (Microsoft, Apple, Alphabet-C, NVIDIA, Amazon, Tesla) with weights exceeding 4.5% to exceed 48%. According to the rebalancing rules, their total weight will be reduced to 40%.
Wells Fargo Bank stated that these giant tech stocks may face further selling pressure due to this rebalancing.
Analysts Chris Harvey and Gary Liebowitz from the bank pointed out in their latest report that during the last special rebalancing of the index in 2011, the stock prices of companies that were downweighted fell by 2-3%.
In this rebalancing, Wells Fargo Bank predicts that Microsoft (-1.8%) will experience the largest reduction in weight, followed by Apple (-1.7%), NVIDIA (-1.0%), Amazon (-1.0%), and Alphabet-C (-1.0%). In addition, Tesla and Meta will also have their weights reduced.
At the same time, some companies may benefit from this rebalancing.
According to Wells Fargo Bank's statistics, in the ten days before the implementation of the rebalancing in 2011, the average return of the top 10 upweighted stocks was 3.9%, while the average return of the top 10 downweighted stocks was 0.2%, with a total return of 2.0%.
Wells Fargo Bank estimates that the stocks with the largest increase in weight in 2023 will be Starbucks, Mondelez International, online travel giant Priceline.com, biopharmaceutical company Gilead Sciences, Intuitive Surgical, Advanced Micro Devices, and employment data company ADP. **
It is worth mentioning that Bank of America has also released a list of companies that have been upgraded in its rebalancing, which has a significant overlap with the list from Wells Fargo.
Although the rebalancing has temporarily affected the recent performance of large-cap tech stocks, Wells Fargo is more optimistic than some:
We believe that this liquidity event will weaken (but not break) the long-term trend of large-cap stocks.
We believe that, similar to 2000, the aggressive Federal Reserve will push the United States into a recession, ultimately destroying large-cap stocks and "new economy" trades.
As long as the economy remains sluggish (i.e., not in a recession), it will be difficult to overturn the relatively optimistic valuation premiums and growth expectations.