Nasdaq 100 to rebalance due to 'magnificent seven' dominance

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Tue, Jul 11, 2023, 10:39 AM

The Nasdaq 100 (^NDX) will be adjusting the weighting of its components because of the outsized gains the "magnificent seven" (Apple (APPL), Tesla (TSLA), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOGL), Meta (META), and Amazon (AMZN)) have seen recently. Nasdaq Global Markets Reporter Jill Malandrino reports the details.

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- The NASDAQ 100 has special plans to rebalance its index to help curb the dominance of the Magnificent Seven stocks, which include tech giants, Microsoft, Apple, Nvidia, Tesla, Google's parent company, Alphabet, Meta Platforms, and Amazon. Jill Malandrino, NASDAQ global markets reporter is here to weigh in on all this. So Jill, what exactly does the NASDAQ 100 plan entail?

JILL MALANDRINO: So Rochelle, let's start with some background here. The NASDAQ 100 index consists of 100 of the largest US and international nonfinancial companies by market cap listed on the NASDAQ Stock Exchange.

The NASDAQ 100 has jumped more than 35% year to date following a revitalization of the tech trade in 2023 that's being driven by a perceived less aggressive Federal Reserve stance on interest rates and investors betting on the implications of a potential leap in artificial intelligence capabilities leading many mega-cap technology companies to outsized gains.

The indexes methodology states that NASDAQ will take action if a largest constituent exceeds a weight of 24%, or if the aggregate weight of all stocks with individual weights above 4.5% is greater than 48%. Now, the Magnificent Seven, Microsoft, Apple, Nvidia, Tesla, Google-- excuse me-- Alphabet, Meta, and Amazon account for more than 50% of the NASDAQ 100 weight.

On Friday, July 7th, NASDAQ announced a special index rebalance effective prior to the market open on Monday, July 24th that aims to address overconcentration within the largest constituents and will adjust the weighting of its 100 components. Some of the selling activity we saw yesterday was not extreme, probably more of a skim off the top.

With not much else going on in the news cycle, the special rebalance will spur stock allocation shifts among ETFs such as the QQQ and mutual funds that track the index. So there could be some one-off gains or losses perhaps as the plan changes are announced on July 14, but it's important to note that it doesn't change the fundamental picture of the companies.

- Now, Jill, speaking of Magnificent Seven constituents, let's talk about Amazon the tech giant holding its annual Prime Day. Will the company shatter the Wall Street expectations here?

JILL MALANDRINO: Yes, so it's Black Friday in July on the 11th and 12th, of course, starting today. Bank of America predicts Prime Day could generate around $12 billion in revenue this year, up 12% from a year ago. Believe it or not, Prime Day only makes up about 1% to 2% of Amazon's annual sales according to analysts, but Amazon uses the sale to build loyalty with Prime subscribers and hook new shoppers to the program.

Amazon's first Prime Day took place in 2015, and for five years, sales growth for the event's 48-hour period really swelled. Prime Day in 2020 marked 30% sales growth over the previous year, not surprising considering we were grappling with COVID restrictions.

Per Bloomberg, Amazon share price has fallen on the week of Prime Day every year since 2019, and that's because Amazon may be synonymous with e-retail to consumers. But the company makes most of its money from cloud computing wing, AWS.

In fact, Wells Fargo this morning added Amazon to its signature picks list citing better expectations for Amazon Web Services, Prime Day revenue growth, and a number of other initiatives that they are pursuing.

- Oh, well, thank you very much Jill Malandrino for joining us on that. Is there anything else that you're keeping an eye on today on the markets?

JILL MALANDRINO: So we're definitely going to be keeping an eye on some important data that comes out tomorrow as well. A number of reports show that inflation could be coming down. Some readings even 3.1% according to real-time data provider Truflation. But one thing to keep in mind here, there's a number of data points that the Fed is laser focused on, of course, one of them being employment.

But regardless of the different inflation data points that we get, the Fed's focused on core and that's really what it's going to come down to. So that's going to be the key number that we are going to be listening to try and parse through and figure out, look, are we going to get this rate hike in July? Does that set us up for another one in September? So I think core is really going to be the key concern here for investors and of course, for Jay Powell and the Fed.

- All right. Well, thank you so much for that update. Jill Malandrino there, NASDAQ global markets reporter. Thank you so much.

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