The dominance of big tech companies has stopped at the Nasdaq 100

Measures are being taken to reduce the influence of large companies on the index.

The seemingly unstoppable growth of megacapitals like Apple Inc. and Microsoft Corp., means that they violated the upper limit set for Nasdaq 100 shares. As a result, Nasdaq Inc. announced a "special rebalancing" - the first of its kind. — the weights of the index members will be redistributed.

The index provider says the July 24 adjustment will "remove excessive concentration in the index by rebalancing the weights," according to the firm on Friday, with more details to be released later this week.

The Nasdaq's extraordinary moves are the result of an inexorable rally that accounts for nearly all of the market's growth as a whole in 2023. Fueled by optimism about artificial intelligence, the strong results sparked a heated debate on Wall Street about whether this meteoric rise could last. .

“This is good because it reduces concentration risk from these players,” said Todd Sohn, managing director of ETFs and technical strategy at Strategas Securities. “On the flip side, it puts more pressure on the rest of the index — what I like to call the “bench” — to keep getting better and stronger.”

While details on this action are scarce, a document on the Nasdaq website states that under certain circumstances, a special rebalancing can be triggered when the portion represented by the largest members of the index exceeds a given threshold. In one scenario, the paper says, the weights could be reduced if the combined influence of the largest companies at 4.5% or more of the scale is more than 48%.

Data compiled by Bloomberg shows that this is exactly what happened on July 3, when six companies — Microsoft, Apple, Alphabet Inc., Nvidia Corp., Amazon.com Inc. and Tesla Inc. – saw that their combined weight reached 50.9%. Nasdaq's method paper says a rebalancing could be done to bring the group's influence down to 40%.

The rebalancing is intended to help fund managers who are linked or oriented to the Nasdaq 100 stay in line with the Securities and Exchange Commission's diversification rule, which limits the combined weight of the largest equity holdings of 5% or more to 50%, according to Cameron Lily, Vice President and Global Head of Index Products and Operations at Nasdaq.

“From our point of view, the motivation to reduce the concentration of the index is solely in terms of regulation,” he said.

All shares in the group fell on Monday, with shares in Alphabet and Amazon falling more than 2%. The traditional version of the Nasdaq 100 was unchanged, while the version that eliminates market cap bias rose 1.8%. This is a sharp reversal from the previous six months, when the Equal Weight Index was 18 percentage points behind.

“Today, due to the rebalancing announcement, Megacap technologies are lagging behind,” said Alon Rozin, head of institutional derivatives at Oppenheimer & Co. "They've all been filled relatively as we're seeing the rotation of money elsewhere."

While the influence of major firms will be reduced and index-tracking funds such as the Invesco QQQ Trust (ticker QQQ) will have to adjust assets, the reshuffle alone is unlikely to cause profound changes to Nasdaq going forward. Apple, Microsoft and Amazon will continue to be at the top of the rankings, matching their 13-figure market values, with weights similar to where they were at various times last year.