US Macro Strategy Weekly Report – 24 July 2023

 

James Ooi/ uSMART Market Strategist

Over 13 years of experience in buy-side and sell-side of capital markets

Former Fund Manager of renowned asset management firm
Focus on fundamental analysis and macro-outlook for US & Singapore markets
SGX Academy trainer

 

This Week’s Market Outlook:

 

• This week's important economic data in the United States includes: Monday's PMI data, Tuesday's consumer confidence index, Thursday's FOMC Statement, U.S. 2Q GDP, initial jobless claims, and durable goods orders, and Friday's June PCE.
• Several important financial reports will be published this week:

July 25 (Tuesday): Verizon, GM, 3M, GE, Spotify, Microsoft, Alphabet, Snap, Visa, Teladoc, Texas Instruments

July 26 (Wednesday): Boeing, AT&T, Coca-Cola, Hilton, Meta Platforms, Chipotle, ServiceNow, Lam Research, eBay

July 27 (Thursday): McDonald's, Mastercard, Honeywell, Enphase, Ford, Intel, Roku

July 28 (Friday): Exxon Mobil, Procter & Gamble, Chevron

• This week, companies representing 48% of the total market value of the S&P 500 index will release their financial reports (as shown in Figure 1), potentially causing significant market volatility.

 

Figure 1: Companies representing 48% of S&P 500 index announcing results this week

Source: Goldman Sachs

 

• We anticipate volatility to start increasing based on seasonality (Figure 2).

 

Figure 2:  VIX Seasonal Chart (Past 25 Years)

Source: uSMART, Bloomberg, 22 Jul 2023

 

Special Issue:

Nasdaq 100 Rebalancing: What Does It Mean for Investors？

The Nasdaq-100 index will undergo a special rebalance, which will take effect before the market opens on Monday, July 24th. The special rebalance was prompted by the outstanding performance of the "magnificent 7" companies, namely Nvidia, Apple, Microsoft, Meta Platforms, Amazon, Tesla, and Alphabet. The significant increase in their share prices led to a rise in their market capitalization and, consequently, their contribution to the Nasdaq-100 weight.

Currently, the "magnificent 7" accounts for 55% of the Nasdaq-100, triggering the special rebalance as rebalance aims to reduce the index's concentration in its largest constituents, in line with the Nasdaq-100 weighting criteria, which are designed to adhere to fund diversification rules. It is important to note that the Nasdaq-100 special rebalance will not result in the addition or removal of any company.

The purpose of the special rebalance exercise is to promote diversification. This can have the effect of shifting investors' focus to smaller weight US stocks within the Nasdaq-100.

 

How Will This Rebalance Affect The 7 Tech Stocks In The Short Term?

*The rebalance weight are based on Pro forma filing.

Source: uSMART, Bloomberg, Bofa, 24 Jul 2023

 

The Nasdaq-100 rebalancing will have the most significant impact on the "magnificent 7" as they will experience the most substantial reduction in weightage. Their combined weight within the Nasdaq-100 index will be decreased from 55% to 44% after the rebalancing. It is important to note that these 7 tech stocks have notably outperformed other component stocks generally this year and have contributed to almost 73.86% of the Nasdaq-100 index's total increase since the beginning of the year.

 

The short-term impact of the Nasdaq-100 rebalancing is expected to come from two fronts: passive management and active management.

 

Passive Management Funds (ETFs):

ETFs that aim to track the Nasdaq-100 index will be affected by the rebalancing. Fund managers of these ETFs will need to buy and sell shares to match the newly rebalanced index. However, the "magnificent 7" companies have already completed their rebalancing at the end of the market closing session on 21 July. This could partly explain why most of the "magnificent 7" suffered some losses near the Friday closing session. Moving forward, when the Nasdaq opens on 24 July, there should be no further impact on these companies from passive funds.

 

Active management Funds (e.g. Unit trust):

 As active funds, unlike passive funds, are benchmark agnostic, the active fund managers are not bound to follow the rebalanced weight of the Nasdaq-100 index. unlike passive funds,

They have the flexibility to make their own investment decisions irrespective of the index. It is notable that since Nasdaq released the pro forma filing weight on 14 July, the "magnificent 7" has suffered an average loss of -3.2%. This suggests that active fund managers have been reducing the weight of these 7 tech stocks in their portfolios.

 

The Performance Of The "Magnificent 7" In The Past Week:

Source: uSMART, Bloomberg, 24 Jul 2023

 

Furthermore, within the next two weeks, five of the "magnificent 7" companies, namely Apple, Microsoft, Meta Platforms, Amazon, and Alphabet, are scheduled to release their earnings reports. If the earnings results are disappointing, it could lead to further selling pressure on these stocks as some active portfolio managers may wait until the earnings release before deciding on portfolio rebalancing

 

2Q2023 Earnings Announcement Date:

Source: uSMART, Bloomberg, 24 Jul 2023

 

However, in the long run, the impact may be limited as these 7 tech stocks are likely to benefit from the ongoing secular growth of AI implementation.

 

Top Constituent changes other than the “magnificent 7”:

Source: uSMART, Bloomberg, 24 Jul 2023

 

The rebalance will result in a reduction of the influence of the "magnificent 7" as their weight is redistributed to other stocks within the Nasdaq-100. By decreasing the weight of these dominant companies, the rebalancing exercise may encourage investors to shift their attention to other component stocks and explore potential opportunities within a broader range of companies. However, since the changes are generally less than 0.5% for component stocks other than the "magnificent 7", the impact should be considered negligible.

Investors should not overreact to the rebalancing exercise since the fundamentals of the companies are more important.

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