JSFiddle - React, Tailwind, and code Playground

HTML

<nav>
  <ul>
    <li>item1</li>
    <li>hover me <br/>check box shadow on right side is missing because of z-index:1</li>
    <li>i want this item to be over the tiny square always but also with box shadow on right side working</li>
    <li>item4</li>
    <li></li>
  </ul>
  <span>
    
  </span>
</nav>
<h1>
Some fake text which must not move, hence the little square is positioned absolute
</h1>

<p>
1. Try removing z-index from li <br/>
2. Try having z-index on li hover only
</p>

SCSS

body {
  background-color: gray;
}
h1 {color: white; text-align: center;}
nav {
  margin: 30px;
}

ul {
  list-style: none;
  display: flex;
  padding: 0;
  margin: 0;
}

li {
  flex-grow: 1;
  flex-basis: 0;
  padding: 0 15px;
  min-height: 150px;
  margin: 0 1px;
  transition: all 0.3s ease-out;
  background-color: white;

  // adding z-index here makes shadow on the right side to dissapear
  z-index: 1;
  &:hover {
    box-shadow: 0px 0px 65px -26px rgba(0, 0, 0, 0.75);
    transform: scale(1.09);
    // if using z-index on hover it has overlap at the end
    //z-index: 1;
  }
}

nav > span {
  position: absolute;
  left: calc(50% - 50px / 2);
  background: white;
  width: 50px;
  margin: 0 auto;   
  box-shadow: inset 0px 6px 5px 0px grey;
  height: 22px;
  transition: all 0.3s ease;
  &:hover {
    cursor: pointer;
    height: 28px;
    margin-bottom: -3px;
    box-shadow: inset 0px 3px 5px 0px grey;
  }
}