Tesla Tips the Scales: Nasdaq 100's Special Rebalance Amid Tech Titan Surge

In a surprising turn of events, Nasdaq is set to undergo a 'special rebalance' on Monday, 24 July 2023. This move is primarily triggered by the skyrocketing share prices of tech behemoth Tesla, causing its weight on the Nasdaq 100 to exceed 4.5% earlier this month. The swift response is aimed at addressing concerns about the market's overweight condition, fueled not only by Tesla's surge but also by the substantial gains of other tech firms.

As of 17 July, the Nasdaq 100 experienced a remarkable 42% surge, significantly outperforming the 17% gain of the S&P 500. This surge was largely attributed to the massive gains made by tech giants such as Microsoft, Apple, Nvidia, Amazon, Meta (formerly Facebook), Alphabet, and Tesla. These companies collectively constituted over 55% of the index, reflecting the global fascination with artificial intelligence (AI).

The Nasdaq's weight adjustment methodology comes into play when the aggregate weights of all issuers with an index weighting equal to or above 4.5% surpass 48%. In such a scenario, their total weight is capped at 40%. On 3 July, the combined weight of the aforementioned tech firms reached 50.9%, triggering the special rebalance scheduled for today.

Announced on 7 July, the special rebalance is based on the index securities and shares outstanding as of 3 July, coupled with the index share announcements and pro-forma file release on 14 July. Financial analytics firm Ortex anticipates that the capped tech giants' shares may experience selling pressures from passive funds responding to the rebalance by reducing their tech weight.

However, the rebalance is not expected to deter overall tech market enthusiasm. Bloomberg reports that tech funds continued to attract substantial investments, with a notable US$1.8 billion flowing in during the week ending 19 July. This marks the fourth consecutive week of inflows, a stark contrast to the US$2.1 billion outflows witnessed in global equity funds over the same period.

Ortex predicts that the most significant passive inflows will center around Meta, with an anticipated influx of nearly $7 billion, effective as of 24 July. Despite this positive outlook, concerns loom large as tech giants like Tesla and Netflix witnessed a significant drop in share prices last week, fueled by disappointing Q2 results. This raises questions about the sustainability of the tech market's upward trend and whether the special rebalance will have a lasting impact.