Friday’s S&P 500 and Nasdaq-100 rebalance may reflect concerns over concentration risk

It’s arguably the biggest stock story of 2023: a small number of giant technology companies now make up a very large part of big indexes like the S&P 500 and the Nasdaq-100. 

Five companies (Apple, Microsoft, Amazon, Nvidia and Alphabet) make up about 25% of the S&P 500. Six companies (Apple, Microsoft, Amazon, Nvidia, Alphabet and Broadcom) make up about 40% of the Nasdaq-100. 

The S&P 500 and the Nasdaq are rebalancing their respective indexes this Friday. While this is a routine event, some of the changes may reflect the concerns over concentration risk. 

A ton of money is pegged to a few indexes 

Now that the CPI and the Fed meeting are out of the way, these rebalances are the last major “liquidity events” of the year, corresponding with another notable trading event: triple witching, or the quarterly expiration of stock options, index options and index futures. 

This is an opportunity for the trading community to move large blocks of stock for the last gasps of tax loss harvesting or to position for the new year. Trading volume will typically drop 30%-40% in the final two weeks of the year after triple witching, with only the final trading day showing significant volume.

All of this might appear of only academic interest, but the big move to passive index investing in the past 20 years has made these events more important to investors. 

When these indexes are adjusted, either because of additions or deletions, or because share counts change, or because the weightings are changed to reduce the influence of the largest companies, it means a lot of money moves in and out of mutual funds and ETFs that are directly or indirectly tied to the indexes. 

Standard & Poor’s estimates that nearly $13 trillion is directly or indirectly indexed to the S&P 500. The three largest ETFs (SPDR S&P 500 ETF Trust, iShares Core S&P 500 ETF, and Vanguard S&P 500 ETF) are all directly indexed to the S&P 500 and collectively have nearly $1.2 trillion in assets under management. 

Linked to the Nasdaq-100 — the 100 largest nonfinancial companies listed on Nasdaq — the Invesco QQQ Trust (QQQ) is the fifth-largest ETF, with roughly $220 billion in assets under management. 

S&P 500: Apple and others will be for sale. Uber going in 

For the S&P 500, Standard & Poor’s will adjust the weighting of each stock to account for changes in share count. Share counts typically change because many companies have large buyback programs that reduce share count. 

This quarter, Apple, Alphabet, Comcast, Exxon Mobil, Visa and Marathon Petroleum will all see their share counts reduced, so funds indexed to the S&P will have to reduce their weighting. 

S&P 500: Companies with share count reduction

(% of share count reduction)

  • Apple        0.5%
  • Alphabet   1.3%
  • Comcast    2.4%
  • Exxon Mobil  1.0%
  • Visa                0.8%
  • Marathon Petroleum  2.6%

Source: S&P Global

Other companies (Nasdaq, EQT, and Amazon among them) will see their share counts increased, so funds indexed to the S&P 500 will have to increase their weighting. 

In addition, three companies are being added to the S&P 500: Uber, Jabil, and Builders FirstSource.  I wrote about the effect that being added to the S&P was having on Uber‘s stock price last week.  

Three other companies are being deleted and will go from the S&P 500 to the S&P SmallCap 600 index: Sealed Air, Alaska Air and SolarEdge Technologies

Nasdaq-100 changes: DoorDash, MongoDB, Splunk are in 

The Nasdaq-100 is rebalanced four times a year; however, the annual reconstitution, where stocks are added or deleted, happens only in December. 

Last Friday, Nasdaq announced that six companies would be added to the Nasdaq-100: CDW Corporation (CDW), Coca-Cola Europacific Partners (CCEP), DoorDash (DASH), MongoDB (MDB), Roper Technologies (ROP), and Splunk (SPLK). 

Six others will be deleted: Align Technology (ALGN), eBay (EBAY), Enphase Energy (ENPH), JD.com (JD), Lucid Group (LCID), and Zoom Video Communications (ZM).

Concentration risk: The rules

Under federal law, a diversified investment fund (mutual funds, exchange-traded funds), even if it just mimics an index like the S&P 500, has to satisfy certain diversification requirements. This includes requirements that: 1) no single issuer can account for more than 25% of the total assets of the portfolio, and 2) securities that represent more than 5% of the total assets cannot exceed 50% of the total portfolio. 

Most of the major indexes have similar requirements in their rules. 

For example, there are 11 S&P sector indexes that are the underlying indexes for widely traded ETFs such as the Technology Select SPDR ETF (XLK). The rules for these sector indexes are similar to the rules on diversification requirements for investment funds discussed above. For example, the S&P sector indexes say that a single stock cannot exceed 24% of the float-adjusted market capitalization of that sector index and that the sum of the companies with weights greater than 4.8% cannot exceed 50% of the total index weight. 

At the end of last week, three companies had weights greater than 4.8% in the Technology Select Sector (Microsoft at 23.5%, Apple at 22.8%, and Broadcom at 4.9%) and their combined market weight was 51.2%, so if those same prices hold at the close on Friday, there should be a small reduction in Apple and Microsoft in that index. 

S&P will announce if there are changes in the sector indexes after the close on Friday. 

The Nasdaq-100 also uses a “modified” market-capitalization weighting scheme, which can constrain the size of the weighting for any given stock to address overconcentration risk. This rebalancing may reduce the weighting in some of the largest stocks, including Apple, Microsoft, Amazon, Nvidia and Alphabet. 

The move up in these large tech stocks was so rapid in the first half of the year that Nasdaq took the unusual step of initiating a special rebalance in the Nasdaq-100 in July to address the overconcentration of the biggest names. As a result, Microsoft, Apple, Nvidia, Amazon and Tesla all saw their weightings reduced. 

Market concentration is nothing new

Whether the rules around market concentration should be tightened is open for debate, but the issue has been around for decades.

For example, Phil Mackintosh and Robert Jankiewicz from Nasdaq recently noted that the weight of the five largest companies in the S&P 500 was also around 25% back in the 1970s.

Disclosure: Comcast is the corporate parent of NBCUniversal and CNBC.

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Stocks making the biggest moves premarket: United Airlines, Netflix, Morgan Stanley and more

Check out the companies making headlines before the bell.

United Airlines — The airline lost 0.9% in the premarket after it announced a net loss for the first quarter. United posted a loss of 63 cents per share, which is 10 cents smaller than the 73-cent estimated loss from analysts polled by Refinitiv. The company reported $11.43 billion in revenue, slightly above the $11.42 billion estimated. 

Interactive Brokers Group — Shares of the electronic broker were down 3.7% after the company reported a miss on earnings in the first quarter. The company posted earnings per share of $1.35, which fell below the $1.41 consensus estimate from analysts polled by Refinitiv.

Netflix – Shares of the streaming giant fell more than 2% after the company reported mixed results on the delayed rollout of its crackdown on password-sharing, which was originally scheduled for the first quarter. Revenue came in slightly below the analyst consensus from Refinitiv, although earnings topped estimates.

Western Alliance – Shares of the beaten-down regional bank jumped more than 20% in premarket trading after Western Alliance said its deposits have been rebounding in April after declining 11% in the first quarter. Wedbush upgraded the stock to outperform after Western Alliance’s quarterly report despite the bank’s net income falling more than 50% from the previous quarter.

Travelers — The insurance stock added more than 3% before the bell after beating Wall Street’s expectations on both the top and bottom lines. The Dow Jones Industrial Average component reported adjusted earnings of $4.11 a share on $9.40 billion in net premiums.

Intel — Shares were down almost 2% after the semiconductor manufacturer announced it would be discontinuing its bitcoin mining chip series, Blockscale, after just a year of production. 

Abbott Laboratories — The medical device company advanced 2.8% after beating top- and bottom-line expectations and reaffirming guidance. The company reported $1.03 in earnings per share on revenue of $9.75 billion for the first quarter, while analysts polled by FactSet anticipated 99 cents in per-share earnings on $9.67 billion in revenue. The company said it still expects full-year adjusted earnings per share to come in between $4.30 and $4.50, in line with the $4.39 consensus estimate of analysts. 

U.S. Bancorp — Shares of the bank were up 1.7% after it announced an earnings and revenue beat for the first quarter. U.S. Bancorp posted $1.16 earnings per share and revenue of $7.18 billion. Analysts polled by Refinitiv had estimated per-share earnings of $1.12 and revenue of $7.12 billion. Meanwhile, the bank reported its quarter-end deposits were down 3.7% to $505.3 billion. 

Rivian Automotive — The electric-vehicle maker slipped about 2% after being downgraded by RBC Capital Markets to sector perform from outperform. The Wall Street firm remains constructive on the longer-term outlook for the stock, but sees limited catalysts to accelerate profitability in the near term. It also slashed its price target in half, to $14 from $28 per share.

ASML Holding – Shares of the chipmaker lost 2.6% in early morning trading after the company reported net bookings for the first quarter were down 46% year-over-year on “mixed signals” from customers as they work through inventory. The shares fell despite ASML reporting an earnings beat for the quarter.

Boeing — Shares of the industial rgiant dipped 0.6% in premarket after CEO Dave Calhoun said that a flaw detected in some of its 737 Max planes won’t hinder its supply chain plans for increased production of its bestselling jetliner this year. The company disclosed a flaw with some of its 737 Max planes last week and said it was likely to delay deliveries.

Morgan Stanley  — Shares were down 3.2% after the bank announced its quarterly earnings. The investment bank and wealth manager posted earnings per share of $1.70 for the first quarter, greater than the $1.62 estimate from analysts polled by Refinitiv. Overall revenue came in at $14.52 billion, above the $13.92 billion consensus estimate from Refinitiv as equities and fixed income trading units performed better than expected. One growth area was wealth management, where revenue increased by 11% from a year ago. The shares, which are outperforming most other banks this year, eased by 2% in early trading despite the results.

Ally Financial — The digital financial services company’s shares were down 1.3% after its first quarter earnings and revenue missed Wall Street’s expectations. Ally posted per-share earnings of 82 cents, while analysts had anticipated 86 cents per share, according to FactSet data. The bank’s adjusted total net revenue also fell below estimates, coming in at $2.05 billion versus the $2.07 billion consensus estimate from FactSet analysts.  

Intuitive Surgical — Shares jumped 8.1% after Intuitive Surgical reported an earnings and revenue beat. The company reported adjusted earnings per share of $1.23, topping against a consensus estimate of $1.20 per share, according to FactSet. Revenue grew 14% from the prior year, coming in at $1.70 billion, compared to estimates of $1.59 billion.

Tesla – Shares dropped more than 2% in the premarket after Tesla slashed prices on some of its Model Y and Model 3 electric vehicles in the U.S. The cuts come ahead of Tesla’s earnings report after the bell on Wednesday and is the sixth time the EV maker has lowered prices in the U.S. this year.

 Zions Bancorporation — The regional bank stock jumped nearly 4% in premarket before its earnings report after the bell Wednesday. Investors could be getting optimistic after its peer Western Alliance said in its first-quarter that deposits have stabilized since last month’s collapse of Silicon Valley Bank.

CDW — The IT company’s shares plunged 10.6% after it reported a weaker-than-expected preliminary quarterly earnings report. CDW issued quarterly revenue guidance of $5.1 billion, falling below the FactSet analysts’ consensus estimate of $5.58 billion. The company said it was significantly impacted by more cautious buying amid economic uncertainty. It also issued guidance for its full-year earnings to fall “modestly below” 2022 levels.

Citizens Financial Group — Shares were down almost 4% after the company’s first-quarter earnings disappointed investors. Citizens Financial’s earnings per share came in at $1, while analysts had estimated $1.13, according to Refinitiv data. The company’s revenue of $2.13 billion also came below analysts’ expectations of $2.14 billion. Citizens Financial reported a 4.7% decline in deposits to $172.2 billion.

— CNBC’s Alex Harring, Tanaya Macheel, John Melloy, Michelle Fox, Yun Li, Jesse Pound and Kristina Partsinevelos contributed reporting

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