Warren Buffett’s unexpected decision to offload a substantial portion of Apple Inc. shares has created a ripple effect that could significantly reshape major stock indices. While this move initially seemed like a blow to the iPhone maker, it could actually unlock a hidden value for Apple in the broader market.
For years, Apple’s influence on key benchmarks like the S&P 500 has been somewhat muted due to Buffett’s long-term holding strategy through Berkshire Hathaway Inc. Because these shares were not actively traded, index providers calculated Apple’s weight using a float-adjusted market capitalization method. This means that the full value of Apple wasn’t fully represented in many indices.
Although the percentage adjustments might appear minor—Apple’s current weighting in the S&P 500 is calculated at 94% of its total market value—this figure is expected to increase to 100% following Berkshire’s sale, according to Piper Sandler & Co. Given Apple’s market cap of around $3 trillion, this adjustment is far from insignificant.
In practical terms, this means that passive funds tracking these indices could be compelled to purchase as much as $40 billion worth of Apple stock during their next rebalancing. To put that into perspective, this is nearly triple the average daily trading volume for Apple shares over the past month. The influx of index funds stepping in to fill the void left by Buffett’s sale could provide fresh ammunition to critics like David Einhorn, who argue that passive investing has distorted market dynamics by disconnecting stock prices from their fundamental values.
However, this development isn’t without its downsides. Other companies within these indices are likely to see their weightings decrease to make room for the increased presence of Apple, which could result in the sale of their shares by index funds.
While the first index rebalancing won’t occur until next month’s quarterly adjustment, traders who anticipate such events are already taking positions, preparing to capitalize on the upcoming changes.
“We often see activity due to rebalances on our desk,” said Michael Kantrowitz, Chief Investment Strategist at Piper Sandler. “People want to be aware of it.”
A spokesperson for S&P Dow Jones Indices declined to comment specifically but pointed Bloomberg News to its standard index methodology.
Analysis and Market Opportunity
Buffett’s sale of Apple shares has created a unique opportunity in the market. Passive funds, which are required to track indices like the S&P 500, may be forced to purchase billions of dollars worth of Apple stock in the near future. This buying pressure could drive up Apple’s share price, potentially benefiting investors who position themselves early. Additionally, this could lead to temporary volatility in the broader market as other stocks within the indices see their weightings reduced, leading to potential sell-offs in those names.
Investors who are aware of these dynamics and act ahead of the index rebalancing could capitalize on the shifts, either by increasing their positions in Apple or by shorting stocks that might be sold off as a result of the rebalancing.
👉Explore AI-powered Automated Trading Today! Register for a free trial now!
✅Read about the automated trading software on Investing.com
