Wall Street’s blue-chip index is undergoing a significant transformation this week, poised to adopt a more contemporary composition that may potentially reverse its recent lag in performance.
Effective Monday, Amazon formally joins the Dow Jones Industrial Average, stepping in for Walgreens Boots Alliance. The ascent of the e-commerce behemoth’s shares by over 80% in the past year underscores its dominance, aligning with other major stocks that have propelled the S&P 500 to unprecedented highs, while the Dow has grappled to match pace.
Comprising a mere 30 components, the Dow pales in comparison to the broader S&P 500 and is influenced by individual stock prices rather than total market capitalization. Consequently, some investors perceive the Dow, established in May 1896, as an inadequate reflection of the American stock market’s breadth.
As technology has assumed a more prominent role in the U.S. economy and market dynamics over the past two decades, the Dow, weighted heavily toward industrial sectors, has consistently struggled to incorporate the fastest-growing firms. Notably, among the top three tech giants by market capitalization in the Dow as of Friday were Apple, Microsoft, and Salesforce, while notable entities such as Nvidia and Alphabet remained absent.
While formally classified as a consumer discretionary stock, Amazon’s stature as a tech powerhouse is widely acknowledged. Its inclusion in the Dow promises to narrow the gap between the index and the S&P.
“The NDR Tech Titans Index consists of nine mega-cap stocks,” noted Ned Davis Research chief U.S. strategist Ed Clissold in a client update on Monday. “The addition of Amazon puts four of the nine in the DJIA. However, the DJIA is still 11.6 percentage points underweight the Tech Titans versus the S&P 500.”
This disparity has contributed to the Dow’s underperformance amid the recent surge led by tech stocks. Over the past year, the S&P 500 has surged by 28%, outpacing the Dow’s 19% gain. According to NDR data, the trailing 12-month correlation between the two indices currently ranks in the bottom 20% since 1926.
The inclusion of Amazon doesn’t automatically signal a rally for the Dow. Historically, stocks removed from the Dow tend to outperform their replacements, particularly in the short run.
Nevertheless, this change could be deemed appropriate if only to demonstrate that the Dow, now overseen by S&P Dow Jones Indices—a joint venture predominantly owned by S&P Global—is adapting to contemporary trends.
“Introducing a Tech Titan could ensure that the most recognizable equity benchmark remains relevant to investors,” Clissold highlighted in his note.
