Tech's dominance of Russell 1000 will hit record levels after latest reconstitution

By Joseph Adinolfi

As Friday's annual reconstitution begins, it is worth looking at how the largest U.S. companies' share of the index has risen over time

This year's furious rally in technology and megacap stocks is set to leave its mark on Friday when FTSE Russell carries out its latest annual index reconstitution.

After the reconstitution is finished, the 10 biggest companies in the large-cap Russell 1000 RUI index are expected to see their combined weighting rise to 34.3%, the highest in the 40-year history of FTSE Russell's U.S. indexes, according to Catherine Yoshimoto, director of product management for the Russell US Indexes at FTSE Russell.

This represents a gain of nearly 20 percentage points since the large-cap index first launched on Jan. 1, 1984, alongside its small-cap sibling, the Russell 2000 RUT, and their parent index, the Russell 3000 RUA.

It makes sense considering how much these stocks have appreciated over the past year, largely driven 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. At this point, it is no secret that the biggest stocks in the U.S. have driven much of the market's gains during that time, with one stock in particular - Nvidia Corp. (NVDA) - accounting for a disproportionate percentage of the gains.

But the U.S. market hasn't always been as lopsided as it is today. Data in the tables below demonstrate how the weighting of the 10 largest U.S. firms in the index has increased over time. They also show how the individual companies at the top of the index have changed, too.

   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 much different toward the end of the 20th century. Back then, the top companies included a smattering of mostly consumer-focused names, along with several healthcare, industrial and energy-focused companies.

The shift reflects the changing nature of the U.S. economy, according to Indrani De, head of global investment research for FTSE Russell.

"Indices are a representation of the economy, and by the same logic, they're picking up on the trends in the underlying economy," De said during 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% 

Unsurprisingly, the technology sector has been the biggest beneficiary of the market's growing tilt toward megacaps. That is no surprise, considering that the top three stocks - Microsoft, Apple and Nvidia - all belong to tech.

There have been some notable shifts within the space. This year, Microsoft Corp. (MSFT) will return to its position as the top stock in the index, which it ceded to Apple Inc. (AAPL) back in 2021.

Also, Nvidia has leapfrogged Amazon.com Inc., while chipmaker Broadcom Inc. (AVGO) has seen its ranking in the index skyrocket from 24th one year ago to 9th this year, making its debut in the top 10.

As of earlier this week, technology would be on track to constitute 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 history of the index, as well as a three-fold increase since the index launched. In early 1984, tech stocks constituted just 14.2% of the index, making tech the third-largest sector after consumer discretionary and energy.

The growing dominance of megacap stocks is impacting the Russell indexes in other ways as well. A number of companies are being squeezed out of the growth index and reclassified as value to make room for the increased heft of the biggest stocks.

Both the Russell Growth RLG and Russell Value RLV indexes will see an influx of newcomers, with 28 companies graduating to the Russell 1000 from the Russell 2000, 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.

To be sure, things look different for the Russell 2000, where healthcare stocks, not technology, will see the biggest increase in their weighting, largely due to a boom in biotechnology names in 2024.

Of the 243 new additions to the Russell 2000 - a combination of demotions, IPOs and other new blood, and graduation from the micro-cap universe - 41 are classified as healthcare.

One of the busiest days of the year

Russell reconstitution day typically coincides with one of the most active trading sessions of the year as passive funds tracking the indexes rejigger their portfolios to match the indexes' new weightings.

Most of this frenetic activity is reserved for the Nasdaq and New York Stock Exchange's closing auctions, according to FTSE Russell. During last year's rebalance, roughly $134 billion in shares changed hands at the close.

"Expect Friday to be one of the busiest days of the year," said Jay Woods, chief global strategist at Freedom Capital Markets, in comments emailed to MarketWatch earlier this week.

As of the end of 2023, roughly $10.5 trillion in passive and active money tracked the Russell's U.S. indexes, according to FTSE Russell.

While fund managers have had more than a month to prepare for the rebalance, it's possible some of the bigger names in the index could be rocked by volatility, according to a team of market strategists at UBS Group led by Patrick Palfrey.

In particular, Palfrey singled out many top value names, including JPMorgan Chase & Co. and Berkshire Hathaway, as potentially at risk for a rebalancing-related pullback.

Adding another potential wrinkle to Friday's rebalance, the Commerce Department will release its latest monthly PCE Price Index, the Federal Reserve's preferred gauge of inflation. Stocks could see large swings depending on what the data show.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-29-24 0750ET

Copyright (c) 2024 Dow Jones & Company, Inc.