By José Adinolfi
As Friday's annual reconstitution begins, it's worth looking at how the share of the largest U.S. companies in the index has increased over time.
This year's furious rally in technology and large-cap stocks will leave its mark on Friday when FTSE Russell conducts its latest annual index reconstitution.
Once the reconstitution is complete, the 10 largest companies in the Russell 1000 RUI large-cap index are expected to see their combined weighting increase to 34.3%, the highest in the 40-year history of the FTSE Russell US indices, according to Catherine Yoshimoto, Head of Product Management for US Russell Indices at FTSE Russell.
This represents a gain of nearly 20 percentage points since the large-cap index was first launched on January 1, 1984, alongside its small-cap sibling, the Russell 2000 RUT, and its parent index, the Russell 3000 RUA.
It makes sense considering how much these stocks have appreciated over the past year, driven largely by the artificial intelligence craze. According to FTSE Russell, the combined market valuation of the largest stocks has grown by nearly 50% since last year's reconstitution. By now, it's no secret that the largest U.S. stocks have driven much of the market's gains over that time, with one stock in particular, Nvidia Corp. (NVDA), accounting for a disproportionate percentage of the gains.
But the US market has not always been as unbalanced as it is today. The data in the tables below demonstrate how the weighting of the 10 largest US companies in the index has increased over time. They also show how the individual companies at the top of the index have changed.
Constituent Name Weightings as of 6/26/2024 Constituent Name 12/29/2023 Constituent Name 6/30/2023 Constituent Name 12/31/2013 Microsoft Corp 6.7% Apple Inc. 6.5% Apple Inc. 7.0% Apple Inc. 2.8% Apple Inc. 6.2% Microsoft Corp 6.4% Microsoft Corp 6.2% Exxon Mobil Corp. 2.4% Nvidia Corp. 6.0% Amazon.com 3.1% Amazon.com 2.9% Microsoft Corp 1.6% 3.6% Nvidia Corp. 2.7% Nvidia Corp. 2.4% Google Inc. 1.6% Meta Platforms Inc 2.2% Alphabet Class A 1.9% Tesla Inc. 1.8% General Electric Co. 1.5% Alphabet Class A 2.2% Meta Platforms Inc. 1.8% Alphabet Class A 1.7% Johnson & Johnson 1.4% Alphabet Class C 1.8% Alphabet Class C 1.6% Meta Platforms Inc 1.5% Chevron Corp. 1.3% Eli Lilly & Co 1.5% Tesla Inc. 1.6% Berkshire Hathaway Class B 1.5% Proctor & Gamble Co. 1.2% Berkshire Hathaway Class B 1.5% Berkshire Hathaway Class B 1.5% Alphabet Class C 1.5% JPMorgan Chase & Co. 1.2% Broadcom 1.4% Eli Lilly & Co 1.1% UnitedHealth Group Inc. 1.1% Wells Fargo & Co. 1.2% JPMorgan Chase & Co 1.1% JPMorgan Chase & Co 1.1% Exxon Mobil Corp. 1.1% Combined weight of 10 largest companies 34.3% 29.2% 28.7% 16.0%
While technology stocks have dominated the upper echelons of the market in recent decades, things looked very different towards the end of the 20th century. Back then, the top companies included a handful of names primarily focused on consumer, along with several companies focused on healthcare, industrials and energy.
The shift reflects the changing nature of the U.S. economy, according to Indrani De, head of global investment research at FTSE Russell.
"Indexes are a proxy for the economy and, by the same logic, they reflect trends in the underlying economy," De said in an interview with MarketWatch.
Constituent Name 12/31/2003 Constituent Name 12/31/1993 Constituent Name 12/30/1983 General Electric Co. 2.9% General Electric Co. 2.4% International Business Machines 4.8% Pfizer Inc. 2.6% Exxon Corp. 2.1% Exxon Corp. 2.1% Exxon Mobil Corp. 2.5% AT&T 1.9% General Electric Co. 1.7% Citigroup Corp. 2.3% Coca-Cola Co. 1.6% General Motors Co. 1.5% Microsoft Corp. 2.3% Philip Morris Cos International 1.3% AT&T 1.1% Intel Corp. 2.0% Merck & Co. 1.2% Standard Oil Co. 1.0% Cisco Systems Corp. 1.6% General Motors Co. 1.0% Schlumberger Ltd. 0.9% Johnson & Johnson 1.4% Proctor & Gamble Co. 1.0% Sears, Roebuck & Co. 0.9% American International Group 1.4% Wal-Mart Stores 0.9% Eastman Kodack Co. 0.8% International Business Machines 1.4% GTE Corp. 0.9% DuPont de Nemours, Inc. 0.8% Combined weight of 10 largest companies 20.4% 14.4% 15.7%
Not surprisingly, the technology sector has been the biggest beneficiary of the market's growing tilt toward mega-caps. This is not a surprise, considering that the top three stocks (Microsoft, Apple and Nvidia) are all in the technology sector.
There have been some notable changes within the space. This year, Microsoft Corp. (MSFT) will return to its position as the index's top stock, which it ceded to Apple Inc. (AAPL) back in 2021.
Additionally, Nvidia has overtaken Amazon.com Inc., while chipmaker Broadcom Inc. (AVGO) has seen its ranking in the index soar from No. 24 a year ago to No. 9 this year, making its debut in the top 10.
As of earlier this week, technology would be on track to make up 36.1% of the index after the annual reconstitution is official on Friday, according to data provided by FTSE Russell. This would represent its largest share in the index’s history, as well as a threefold increase since its launch. At the start of 1984, technology stocks made up just 14.2% of the index, making technology the third-largest sector after consumer discretionary and energy.
The growing dominance of mega-cap stocks is affecting the Russell indexes in other ways, too. Several companies are being kicked out of the growth index and reclassified as value to make room for the greater weight of larger stocks.
Both the Russell Growth RLG index and the Russell Value RLV index will see an influx of newcomers, with 28 companies graduating from the Russell 2000 to the Russell 1000, including Super Micro Computer Inc. (SMCI), Microstrategy Inc. (MSTR) and Carvana (CVNA). IPOs and spinoffs will also see a handful of stocks join the large-cap index.
Things certainly look different for the Russell 2000, where healthcare stocks, not tech, will see the biggest increase in weighting, largely due to a surge in biotech names in 2024.
Of the 243 new additions to the Russell 2000 (a combination of downgrades, IPOs and other developments, and graduation from the microcap universe), 41 are classified as healthcare.
One of the busiest days of the year.
Russell reconstitution day typically coincides with one of the busiest trading sessions of the year, as passive funds that track the indexes rebalance their portfolios to match the indexes' new weightings.
Most of this frenetic activity is reserved for the closing auctions of the Nasdaq and the New York Stock Exchange, according to FTSE Russell. During last year's rebalancing, approximately $134 billion of shares changed hands at the close.
“We expect Friday to be one of the busiest days of the year,” Jay Woods, chief global strategist at Freedom Capital Markets, said in emailed comments to MarketWatch earlier this week.
At the end of 2023, approximately $10.5 trillion in passive and active money tracked US Russell indices, according to FTSE Russell.
While fund managers have had more than a month to prepare for the rebalancing, some of the index's biggest names are likely to be hit by the volatility, according to a team of UBS Group market strategists led by Patrick Palfrey.
In particular, Palfrey highlighted many high-value names, including JPMorgan Chase & Co. and Berkshire Hathaway, as potentially at risk of a rebalancing-related pullback.
Adding another potential complication to Friday's rebalancing, the Commerce Department will release its latest monthly PCE price index, the Federal Reserve's preferred inflation gauge. Stocks could see big swings depending on what the data shows.
-Jose Adinolfi
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06-29-24 0750ET
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