- The S&P 500's market-cap weighting doesn't fully reflect the strength of Dow leaders IBM, Verizon, Merck, and Travelers.
- Reliable dividend stocks like Coca-Cola and 3M contribute to the Dow's traditional market indicator role.
- Dow stocks Apple, Microsoft, Salesforce and Amgen benefit from emerging trends like AI, cloud computing and drug development.
- 5 stocks we like better than Alphabet
You don't hear as much about the Dow Jones Industrial Average as investors did a few decades ago, as the broad consensus has deemed the S&P 500 a better indicator of market conditions.
But the Dow is rallying to all-time highs, led by International Business Machines NYSE: IBM, Verizon Communications Inc. NYSE: VZ, Merck & Co. Inc. NYSE: MRK and perhaps an unlikely leader, insurance giant The Travelers Companies, Inc. NYSE: TRV.
Those first three components, hailing from the ranks of technology stocks, telecom stocks and pharmaceutical stocks, make sense, as those areas have been in growth mode.
As a whole, the decidedly unglamorous insurance industry has been on a tear. The iShares U.S. Insurance ETF NYSEARCA: IAK advanced 6.85% in January.
Leading Dow stock gaps higher
Before reviewing the internals of the Dow itself, and whether it's become a relevant market indicator lately, take a look at the Travelers Companies chart. The stock leaped 6.72% on January 19 as the company reported core income more than doubled as premiums and income from investments rose, while catastrophe insurance payments declined.
Personal insurance premiums climbed 13% as customers' rates increased.
Travelers stock began rallying in late October and has posted a three-month gain of 32.01% and a January gain of 10.83%.
Sure, Travelers looks like a good stock at the moment, as it's trading at new highs, and analysts expect double-digit earnings growth this year and next.
Dow gainers' S&P weightings
But its performance as a Dow leader is instructive, taken in context with fellow top performers IBM, Verizon and Merck.
Here's where those four stocks stack up in terms of weightings in the S&P 500:
- IBM: 0.42%
- Verizon: 0.43%
- Merck: 0.75%
- Travelers: 0.12%
You can pretty easily see that none of those are likely to make a dent in S&P performance to the degree of tech stalwarts and index heavyweights Microsoft Corp. NASDAQ: MSFT, Apple Inc. NASDAQ: AAPL, Nvidia Corp. NASDAQ: NVDA, Amazon.com Inc. NASDAQ: AMZN, Alphabet Inc. NASDAQ: GOOGL and Meta Platforms Inc. NASDAQ: META.
The influence those stocks have over S&P performance has been widely documented. Like the Dow, the S&P 500 is also trading at new highs, driven by AI business of stocks including Nvidia, Juniper Networks Inc. NYSE: JNPR and Advanced Micro Devices Inc. NASDAQ: AMD.
Is the Dow a market strength indicator?
But that brings us back to the question of whether the Dow has renewed value as a market indicator.
The S&P's market-cap weighting isn't reflecting the strength of IBM, Verizon, Merck and Travelers in its overall return. That arguably puts the Dow in a position of more accurately indicating market breadth beyond a handful of stocks rallying on the promise of AI.
It may seem old-fashioned to look to the Dow as a market indicator. That makes sense, given the Dow's inclusion of reliable dividend stocks such as Coca-Cola Co. NYSE: KO and 3M Co. NYSE: MMM, with less reliance on fast-moving, younger growth stocks.
Despite its smaller size compared to the S&P 500, the Dow's 30-stock concentration gives it some value as a snapshot of traditional blue-chip stock movements.
Dow also tracks market's growth themes
At this juncture, it's not a bad indicator of market health outside of stocks rallying on gains from hot investing themes including AI, cloud computing and anti-obesity drugs. All of those offer a compelling investment thesis, but they represent very select corners of the market.
That's not to say there aren't stocks in the Dow benefiting from those trends. For example, Apple, which rallied in 2023 despite not being an AI player, is getting new attention for its AI efforts and the launch of its Vision Pro spatial computing headsets.
Dow components Microsoft and Salesforce Inc. NYSE: CRM have a presence in both AI and cloud computing, and Amgen Inc. NASDAQ: AMGN has been rising due to its applications of AI in the field of drug discovery, as well as its advances in cancer treatments.
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