The weightage of the Nasdaq 100 index’s components is about to change. Currently the Big Tecg companies namely Microsoft (MSFT), Apple, Netflix, Google parent Alphabet (GOOGL), Meta Platforms (META), and Amazon.com (AMZN) account for more than half of the index’s weight. The recent rise of the Magnificent Seven Stocks is fast becoming every investor’s favourite. The stocks making the list of ‘Magnificient 7’ are Apple, Microsoft, Nvidia, Amazon, Meta, Tesla, and Alphabet.

The Nasdaq 100 index rebalancing is, perhaps, aimed at reducing the dominance of such ‘Magnificient 7’ and other big tech stocks. The ‘Magnificent Seven’ stocks account for around 90% of gains on Wall Street’s S&P 500 this year. The Nasdaq 100’s top seven companies account for 55% of the index. This combined weighting appears likely to be reduced. It’s also possible that there will be significant weighting shifts within these seven titans.

Nasdaq stock exchange has announced that the Nasdaq-100 Index will undergo a Special Rebalance effective prior to the market open on Monday, July 24, 2023. According to the index methodology, a Special Rebalance may be conducted to address overconcentration in the index by redistributing the weights. The Special Rebalance will not result in the removal or addition of any securities.

A special rebalancing can be called in certain circumstances when the portion represented by the index’s biggest members exceeds a preset threshold. According to Nasdaq, weights can be pared back if the combined influence of the largest companies — those making up 4.5% or more of the gauge — adds up to more than 48%.

Data compiled by Bloomberg show that was the case on July 3, when six companies — Microsoft, Apple, Alphabet Inc., Nvidia Corp., Amazon.com Inc., and Tesla Inc. — saw their combined weight reach 50.9%. The Nasdaq methodology paper says a rebalancing may be enacted to reduce the group’s influence to 40%.

The index is typically reconstituted annually in December, with additional rebalancing opportunities each quarter. The Special Rebalance of the index will be enacted based on the index securities and shares outstanding as of July 3, 2023, and the index share announcements and pro-forma file release will take place July 14, 2023.

As of July 7, Microsoft stock had the highest weight, at 12.9%. Despite having a $2.999 trillion market cap compared to Microsoft’s $2.51 trillion, Apple stock has a 12.5% weight. With the GOOGL and GOOG share classes combined, Google stock has a 7.4% weighting. Because of its $1.05 trillion market valuation, Nvidia stock has risen to a 7% Nasdaq 100 weighting. This is a somewhat higher weight than Amazon stock (6.9%), despite the fact that the latter is substantially more valuable at $1.33 trillion. With weights of 4.5% and 4.3%, respectively, Tesla stock and Meta Platforms round out the top seven members.

There is considerable concern that this small group of stocks is distorting the general health of the stock market, which is likely what prompted the special rebalance. If the stock price of any heavyweight stock becomes volatile in the next few days, it could be due to the rebalancing factor.