How The NASDAQ Rebalance Could Impact Your Stocks
The NASDAQ's surprising decision to reshuffle its holdings is moving key stocks.
The NASDAQ 100 got off to its best start in 40 years through June. So far, it's continuing its winning ways in July, too. The NASDAQ 100 ETF (QQQ) - Get Free Report has gained over 40% year-to-date, a remarkable achievement given last year's bear market had investors scurrying toward the sidelines.
The rally has primarily been driven by the "magnificent seven," a collection of technology-oriented big-cap stocks that includes Meta Platforms (META) - Get Free Report, Apple (AAPL) - Get Free Report, Amazon (AMZN) - Get Free Report, Alphabet (GOOGL) - Get Free Report, Microsoft (MSFT) - Get Free Report, Nvidia (NVDA) - Get Free Report, and Tesla (TSLA) - Get Free Report.
Those stocks have benefited from investors tip-toeing back into the stock market via the relative safety of large companies. Interest in owning stocks poised to benefit from accelerating spending associated with artificial intelligence and a weaker U.S. Dollar have also contributed to gains.
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The Magnificient Seven's Big Move Creates a Big Problem
Indeed, the moves are impressive. Microsoft and Apple are up 61% and 53% from their lows last fall, respectively. Others have performed even better. For instance, Meta Platforms and Tesla have more than doubled from their lows thanks to optimism over ad spending and electric vehicle demand.
The gains in the magnificent seven coincided with Wall Street analysts' rosier outlook. The average consensus earnings estimate has increased by 15% for these stocks over the past 60 days. Nvidia's outlook has risen by an eye-catching 89% after forecasting significantly higher second-quarter revenue and profit than analysts anticipated. Only Google has seen its full-year EPS outlook slip in the past two months.
Improving earnings is good news, but the strength in these stocks has also created a problem: These stocks now represent a significantly higher weighting in major stock market indexes than last year. For example, Microsoft and Apple represent about 25% of the NASDAQ 100. The top 10 holdings account for nearly 60% of the index. This means these stocks now have a much larger influence over the index than investors may realize.
The lopsided weights haven't gone unnoticed. On July 7, the NASDAQ announced it will conduct a special rebalancing to address the problem later this month. The changes won't only impact the biggest stocks. They'll also influence what happens next for smaller stocks in the NASDAQ 100, such as SiriusXM (SIRI) - Get Free Report.
In this wide-ranging podcast, Action Alerts PLUS lead portfolio manager Chris Versace and I sit down to discuss the implications of the NASDAQ 100's special rebalancing and the rules likely to govern the changes.
Additionally, the podcast highlights what may happen with inflation later this year, and what you should most pay attention to this earnings season.
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