Comment by timoth3y
5 days ago
The saving grace of the SP500 and most similar indexes is that they are cap-weighted. So if SpaceX only, floats 5% only that 5% of their capitalization counts for index calculation.
The Nasdaq100 is more complicated. SpaceX's 5% would be counted as about 25% of their total market cap for indexing.
It's worse than that, because S&P500 and Nasdaq100 share stocks. Like all of the MAG7 stocks. So if mag7 stocks dip because they're being structurally sold to buy SpaceX, then the S&P500 goes down too.
Arguably even worse because at least Nasdaq100 would have SpaceX in it that's getting bid up to offset the losses in other stocks. S&P won't have SpaceX right away. So it just goes down.
And the more those stocks go down, the lower their market cap - which means next rebalancing date they potentially get re-weighted again causing a bit more selling, etc. Presumably the companies that can will counter this with more buy-backs to keep their share price propped at an acceptable level (?).