Nasdaq 100 set for special rebalance amid 'Magnificent Seven' domination
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They were once called the FAANGs, and then MAMAA stocks, before evolving into the Magnificent Seven. But whatever Mad Money's Jim Cramer wants to call it, the group's outsized influence is starting to cause some trouble for market indices. Following a return of the tech trade and a major rally in 2023 helped by the AI craze, some of the financial world's benchmarks are now upending diversification rules, resulting in profound impacts for countless investing products and the hundreds of billions of dollars that are linked to them.
Snapshot: The Nasdaq 100 (NDX), the go-to index for prominent growth-oriented stocks, has surged nearly 40% YTD, compared to the 15% gain of the S&P 500. The power behind the bull market that resumed in March is being led by the Magnificent Seven and their stellar performance in 2023: Alphabet (GOOGL) +31%, Microsoft (MSFT) +39%, Amazon (AMZN) +48%, Apple (AAPL) +51%, Meta (META) +136%, Tesla (TSLA) +149% and Nvidia (NVDA) +195%. Putting things in perspective, without the big gains of the gunslinging gang, the S&P 500 would be slightly underwater for the year. "Overconcentration" is even present in the Nasdaq 100 (NDX), which revels in these types of heavyweight stocks, forcing the index provider to pull the trigger.
Unlike a reconstitution, where stocks are removed or added, a rebalancing changes the weights of an index and their stock component percentages. The Nasdaq has only conducted a special rebalance twice in the past - in December 1998 and May 2011. The rules state that action will be taken if the aggregate total of all stocks with individual weights above 4.5% in the index exceed 48% (currently, the "Magnificent Seven" stocks account for 55% of the total weighting of the Nasdaq 100). Apple exceeds $3T market cap as analysts heap praise on tech giant
What to watch: Rebalancing changes will be announced on July 14 and take effect before the market opens on July 24. Keep an eye on ETFs like the Invesco QQQ Trust (NASDAQ:QQQ), Invesco NASDAQ 100 (NASDAQ:QQQM) and the ProShares UltraPro QQQ ETF (NASDAQ:TQQQ), as well as positioning that could occur beforehand. SA analysts like Jim Sloan also explore if The Leadership Of The Magnificent Seven Makes Sense by comparing value vs. growth dynamics, while UFD Capital urges investors to take the long-term perspective despite bubble fears over artificial intelligence.
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