The tech-heavy Nasdaq 100 looks a little different today…
Last week, I notified you of a special rebalance in the index that’s set to impact the vast majority of investors in America … and the rest of the world.
To recap: The cap-weighted Nasdaq 100 is dominated by less than a tenth of its stocks. The so-called Magnificent Seven made up 55% of the entire index before the special rebalance was put into effect yesterday morning.
Those stocks are:
- Apple (AAPL).
- Microsoft (MSFT).
- NVIDIA (NVDA).
- Amazon.com (AMZN).
- Tesla (TSLA).
- Alphabet (GOOGL).
- Meta Platforms (META).
Yesterday, the changes took effect. Some are more pronounced than others. And what’s even more important to understand is how this rebalance benefits stocks outside the Magnificent Seven just as much as it mitigates those mega-cap techs’ presence in the index.
I want to look at the biggest changes we saw in the Nasdaq yesterday … how the market reacted … and what moves you should consider as an investor today.
Starting with…
Postmortem to the Nasdaq Rebalance
Right off the top, we need to cover the most significant and obvious changes in the rebalance.
The top seven stocks with the heaviest weighting in the Nasdaq 100 now make up 44% of the index, down from 56% before the rebalance.
That’s not exactly a radical reduction. Those seven companies still dominate the index — they’re just no longer the majority.
There’s also nothing stopping this imbalance from happening again. If the tech rally continues as it has so far this year and the largest companies continue to drive returns and attract capital faster than the other companies, we’ll be right back where we started — and soon.
Of the Magnificent Seven, Microsoft’s and Apple’s weights were reduced the most — each of them dropped four percentage points. Most others of that cohort were reduced by less than two percentage points.
That hasn’t borne out much in the way of price action so far. Each stock had a somewhat muted day of trading on Monday, with MSFT gaining 0.4% and AAPL ending the day flat.
But like I said last week, this rebalance guarantees some amount of forced selling in every ticker affected by this rebalance. These two will face the most of it.
Of course, there are two sides to this trade-off.
The rebalance favored certain smaller stocks in the Nasdaq 100. Most of the stocks outside the seven gained some weight in the index — however minor. One “standout” broad-based tech product-maker, Broadcom Inc. (AVGO), had its rating raised 64 basis points.
So those were the main changes of the rebalance. Mega-cap stocks slimmed up a bit and “not quite so mega but still large cap” stocks got a little boost.
That begs the question: What, if anything, is there to make of this special rebalance?
I’ll tell you…
Mega-Cap Stocks Have Hit a “Soft Ceiling”
The most important part of what happened with the Nasdaq 100 is its somewhat symbolic nature.
Leadership at the Nasdaq exchange became concerned that its group of 100 stocks looked like a list of seven… plus 93 laggards. It took deliberate steps to mitigate that … and has set the precedent that anything more than 50% is a by and large inappropriate weighting for such a small number of companies.
This creates something of a “soft ceiling” for the biggest of Big Tech. If the stocks rise too quickly in relative value compared to the smaller-cap names in the index, the Nasdaq will rein them in.
What this says to me, most essentially, is that the arbiters of one of the most widely invested index funds in the world want to give smaller companies a chance to catch up.
That’s significant. It’s a signal to us as investors to “think small” and find quality investments that won’t be subject to institutional-level downsizing.
It’s just one of many reasons to invest in small-cap stocks.
For one, small caps have historically outperformed large caps in the aftermath of an economic downturn. When the market is setting up for a new bull cycle, small stocks stand to benefit most from new, confident capital.
Think about that in the context of where we are today:
- Inflation is cooling, notching under 5% at the last Consumer Price Index report.
- Consumer sentiment is at its highest level since September 2021 — and rising.
- And the large-cap stocks are a stone’s throw from making a new all-time high.
Meanwhile, small-cap stocks are still well below their 2021 highs. That spells opportunity for me. At the very least, there’s more potential than what we’re seeing in the mega-cap tech “soft ceiling.”
How do I suggest you play this? Kind of like how I do for subscribers of my small-cap focused research service, 10X Stocks.
Look for companies that have not just one of, but all of the following characteristics:
- A fast-growing business.
- Strong relative momentum compared to its peers.
- Mega trends at its back.
I understand that last point is more imprecise than the previous two. Let me explain…
You won’t find mega trends in a company’s balance sheet. You can sometimes find them in mainstream media headlines, but often only after it’s far too late.
These are the trends shaping the future of technology and investment. They’re the ideas talked about in tight-knit investment circles, or among the smartest innovators in Silicon Valley.
One such trend, on a stock I recommended this past March that’s already up over 100%, is Web3. For those keeping score, that’s more than double MSFT’s gains year to date.
I could write another 1,000 words explaining why Web3 is so promising, but that’s beyond the scope of what we’re talking about today. (Maybe I’ll tackle this in a future edition of Stock Power Daily.)
Put it like this… If you don’t know what Web3 is … that should tell you how early days we still are for that trend. Give it a Google search and see for yourself.
Or just check out what I’m doing in 10X Stocks for more about this mega trend, the ticker for this recommendation and my own magnificent — and diverse — portfolio of stocks tracking other mega trends that will define our future.
To good profits,
Editor, Stock Power Daily
