Nasdaq 100: How The Special Rebalance Punishes The ‘Magnificent 7’

The Nasdaq 100 — one of the best-known and top-performing stock indexes — gets shaken up today. And some of the changes from the “special rebalance” might surprise you.

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The biggest surprise of all? One of the so-called “Magnificent Seven” stocks, Meta Platforms (META), dodges the pending changes, says an analysis by Bespoke Investment Group. Meta’s weight in the Nasdaq 100 will actually rise slightly.

The stock skates through the rebalance’s rules designed to limit the weight of the dominant stocks in the index. The Nasdaq 100 owns the 100 most-valuable nonfinancial stocks in the Nasdaq.

This twist shows just how difficult it is to tame the outsize influence this group of stocks is having on markets, says Robert Maltbie, fund manager of Argonaut 2000 Partners. “Everyone is wrapped around these seven stocks,” he said.

Apple Isn’t The Top Nasdaq 100 Change

What’s prompting the rare special rebalance in the Nasdaq 100? It’s triggered when all the Nasdaq 100 stocks with individual 4.5% market value weights collectively account for 48% or more of the index.

And that happened on July 3, with six stocks: Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL), Amazon.com (AMZN) and Tesla (TSLA). Together they accounted for 50.9% of the Nasdaq, Bespoke found. It’s the third time since 1998 this rebalance happened.

And this raises another surprise. Apple isn’t the stock to see the largest weighting cut in the Nasdaq 100. That’s surprising as Apple is the most valuable stock in the Nasdaq 100, valued at roughly $3 trillion. But its weighting in the index is only falling 2.66 percentage points from its July 3 level, Bespoke said.

That’s smaller than the 2.74 percentage point drop by Microsoft. The software giant’s weight in the Nasdaq 100 is dropping to 10.06 from 12.8. Microsoft’s big weighting cut is a remnant of the last Nasdaq 100 special rebalance during the tech rally of the late 1990s. At that point, Microsoft alone accounted for a quarter of the Nasdaq 100.

Meta Platforms’ Weight Rises (A Little)

Why is Meta spared the kneecapping applied to the others? It’s all about timing.

On July 3, the social media giant only accounted for 4.2% of the Nasdaq 100. That’s just below the 4.5% balance threshold. There’s the interesting part. Since Meta isn’t directly part of the rebalance, its weight would increase to 5% as the other six giants’ weights are cut. But Nasdaq’s rules cap weightings at 4.4%, which will be Meta’s new weight, Bespoke says.

The Nasdaq 100 Will Still Be Top Heavy

Even after the special rebalancing, though, the Nasdaq will still hinge on just a few giant stocks.

The six most-valuable stocks on the Nasdaq 100 will still account for 40% of the index following the changes. That’s down from 50.9% on July 3, but still “very concentrated,” Maltbie says. And that exposes the index to risk, as many of the Magnificent Seven stocks are extended past historical averages.

“The Magnificent Seven has created a statistical aberration,” he said.

Nasdaq 100 Tends To Perform Fine Following Special Rebalances

You might think these special rebalances might take the wind out of the Nasdaq 100’s sails. But that’s not true historically: The index tends to do fine following these events.

Following the 1998 rebalance, the tech boom continued. The Nasdaq soared 112% in the 12 months following that rebalance, Bespoke found. And even following the May 2011 special rebalance, the Nasdaq 100 rose another 9%.

“The 9% gain a year later isn’t so bad,” Bespoke said. “Based on these historical examples, the Nasdaq’s special rebalance doesn’t signal doom or a major reversal for the market; if anything, a continuation of recent trends is the signal sent by limited precedent.”

How The Nasdaq 100 Changes

Sources: Bespoke Investment Group, IBD