Friday's Upcoming Rebalance of S&P 500 and Nasdaq-100 Highlights Concentration Risk

The upcoming rebalance of the S&P 500 and Nasdaq-100 indexes on Friday has been a subject of significant market discussion, shedding light on the concentration risk posed by the tech sector's largest giants. Notably, Apple, Microsoft MSFT, Amazon, Nvidia NVDA, and Alphabet collectively account for approximately 25% of the S&P 500's market capitalization. Meanwhile, these companies, along with one additional tech firm, comprise around 40% of the Nasdaq-100 index.

Understanding the S&P 500 Composition

The S&P 500 is a market-capitalization-weighted index of 500 of the largest publicly traded companies in the U.S. The significant share that the top five companies hold in this index has raised concerns over the risks associated with such high concentrations within the market. A rebalance intends to address these issues by adjusting the weightings of these stocks to ensure a more diversified and stable index.

Impact and Significance of Nasdaq-100's Structure

Likewise, the Nasdaq-100 exhibits a similar concentration scenario with an even higher stake of approximately 40% held by its top six companies. This heavy concentration in a handful of tech stocks emphasizes the influence these entities have on the overall performance of the index, potentially magnifying the effects of any price movements within this sector on the broader market.

Microsoft Corporation MSFT stands out as a leading American multinational technology firm known for its broad range of products including software, personal computers, and services. Microsoft's prominence in the technology industry is highlighted by its high revenue rankings and its status as one of the Big Five U.S. IT companies.

Similarly, Nvidia Corporation NVDA has established itself as a dominant force in the technology sector with its innovative graphics processing units and system on chip units catering to various markets from gaming to automotive.

concentration, risk, rebalance