The upcoming rebalance of the Nasdaq 100 index is expected to have repercussions for mega-cap stocks. While some companies may face selling pressure, others are primed to outperform, according to Wells Fargo.
Rebalancing to Address Overconcentration
Nasdaq has announced plans to rebalance the weightings of its constituents in response to concerns of “overconcentration” within the index. The tech giants that have experienced significant gains this year are a driving force behind this decision.
The Impact on “Uber Cap” Names
Wells Fargo analysts state that the rebalance will create selling pressure for the so-called “uber cap” names. They draw attention to the 2011 rebalance, where stocks that experienced the most significant weight reductions lagged behind by 2% to 3% between the announcement and the rebalancing event. In contrast, top up-sizers performed better during this period.
The Biggest Down-sizers and Up-sizers
According to Wells Fargo’s index strategists, the largest down-sizers in this rebalance will be Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Amazon (AMZN), Tesla (TSLA), Meta Platforms (META), and Alphabet (GOOGL). On the other hand, Starbucks (SBUX), Mondelez International (MDLZ), Booking (BKNG), Gilead Sciences (GILD), Intuitive Surgical (ISRG), Analog Devices (ADI), and Automatic Data Processing (ADP) are anticipated to be the top up-sizers.
Comparing Weight Changes to 2011
The analysts note that the weight adjustments in this rebalance are smaller compared to those made in 2011. For instance, Apple’s weighting was reduced from over 20% to roughly 12% in the previous rebalance. In the upcoming rebalance, Apple and Microsoft, as the top down-sizers, will have their weightings cut by less than 2 percentage points.
The Long-Term Impact on Uber Cap Trend
Wells Fargo analysts believe that this rebalance will dent, but not break, the longer-term uber-cap trend. They draw a parallel to the year 2000 when an aggressive Federal Reserve that drove the US into a recession ultimately undid the uber-cap and “new economy” trades.