Home Stock Market Nasdaq 100 ‘Special Rebalance’: Goldman Sachs Analyses Impact on Tech Stocks Concentration

Nasdaq 100 ‘Special Rebalance’: Goldman Sachs Analyses Impact on Tech Stocks Concentration

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The Nasdaq 100 index, known for its heavy concentration of technology stocks, is set to undergo a ‘Special Rebalance’ on July 24. With the objective of addressing the high level of concentration within the index, this event is expected to reduce the weight of the largest seven stocks by 12%, bringing their dominance down from 56% to 44%. However, despite this adjustment, Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) will retain their positions as the largest constituents of the index.

To gain deeper insights into the potential effects of this rebalance, Goldman Sachs strategists have conducted an analysis of the anticipated changes. According to their assessment, the Information Technology (Info Tech) sector will still account for roughly half of the Nasdaq 100 index, even after the rebalance. In a client note, the strategists highlighted that the declining weights of the affected stocks are expected to drive passive net selling worth more than a day’s average trading volume in companies such as GOOGL, MSFT, AMZN, and NVDA.

While the rebalance aims to mitigate concentration risks, Goldman Sachs strategists argue that the overall impact on the affected stocks will likely be limited. They predict that Broadcom (NASDAQ: AVGO) will experience the most significant increase in index weight, rising from 2.4% to 3.0%. To provide historical context, the strategists referred to a similar rebalance that occurred in 2011 when the Nasdaq reduced the weight of AAPL from 20% to 12%. Surprisingly, this change did not have a clear negative effect on the stock’s performance. Similarly, MSFT showed no significant impact despite its index weight increasing by nearly 5 percentage points to 8% during the rebalance period. In fact, MSFT underperformed AAPL in the weeks surrounding the rebalance.

In light of these historical observations, the Goldman Sachs strategists express skepticism that the upcoming special rebalance will fully address the challenge posed by the current high market concentration. They argue that even after the rebalance, the Nasdaq 100 index will still be considered too concentrated to be regarded as an actively managed “diversified” fund according to the Securities and Exchange Commission (SEC). Stocks with weights greater than 5% will continue to account for a significant portion of the index, totaling 32%.

While the special rebalance of the Nasdaq 100 index marks an important step toward addressing the concentration of major tech stocks, it may not be a complete solution. The rebalance alone may not fully alleviate the challenges of market concentration for many benchmarked investors. The fact that the Info Tech sector will continue to represent a significant portion of the index indicates that further measures may be necessary to achieve a truly diversified and balanced index composition.

As the July 24th rebalance approaches, market participants and investors will closely monitor the potential impact on the affected stocks and the overall performance of the Nasdaq 100 index. The rebalance serves as a reminder of the ongoing efforts to ensure a well-functioning and resilient market, where diversification and risk management are essential considerations. Balancing concentration risks while maintaining a vibrant and competitive tech sector remains a crucial task for market regulators and participants alike.

In conclusion, the upcoming Nasdaq 100 ‘Special Rebalance’ aims to address the concentration risks associated with major tech stocks within the index. While adjustments are expected, the impact on the affected stocks may be limited, as historical evidence suggests that previous rebalances did not have significant negative effects. The Info Tech sector will continue to play a dominant role in the index, signaling the need for further measures to achieve greater diversification. As the rebalance approaches, market participants will closely monitor its impact on the affected stocks and the broader performance of the Nasdaq 100 index, highlighting the ongoing efforts to maintain a resilient and balanced market environment.

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Julie J

Julie is a renowned crypto journalist with a passion for uncovering the latest trends in blockchain and cryptocurrency. With over a decade of experience, she has become a trusted voice in the industry, providing insightful analysis and in-depth reporting on groundbreaking developments. Julie's work has been featured in leading publications, solidifying her reputation as a leading expert in the field.

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