Market Analysis

Dow's Ascent to Record 40,000 Points

Amos Simanungkalit · 17 May 20246.9K Views

The Dow Jones Industrial Average, historically lagging behind other major U.S. stock indexes this year, briefly surpassed 40,000 points for the first time in its history on Thursday. This milestone, along with recent records for the S&P 500 and Nasdaq Composite, reflects growing investor confidence in a potential economic soft landing for the U.S., where the Federal Reserve controls inflation without severely impacting growth.

A robust earnings season has also fueled stock gains, with 77% of companies beating estimates, compared to the historical average of 67%, according to LSEG IBES data as of May 10.

While the Dow is weighted by share prices of its components, the S&P 500 is weighted by market value. The Dow’s infrequent changes mean it can be slower to include high-performing companies. As of December 2023, $89 billion in assets were benchmarked to the Dow, compared to $11.45 trillion to the S&P 500, based on S&P Dow Jones Indices' annual survey.

Despite this, the Dow retains significant cultural importance. Established in 1896, it predates the S&P 500 (1957) and the Nasdaq (1971). The Dow outperformed the S&P 500 in eight of the last 20 years. This year, it has risen 5.8%, compared to the S&P 500's 11.1% and the Nasdaq's 11.2% gains.

"The Dow is America's index," said Quincy Krosby, chief global strategist at LPL Financial. "It has been slighted by professionals, but the Dow is enduring and represents Main Street America."

The index closed at 39,869.38 on Thursday after a reversal in afternoon trading.

Historically, the Dow's passage through 10,000-point milestones has been followed by accelerated gains, though reasons for this momentum are hard to pinpoint. On average, the Dow gains 4.3% in the month following such milestones, well above its historical one-month average gain of 0.57% since May 1896.

"Breaking the 40,000 barrier is a big psychological boost for the bulls as round numbers hold special significance in people's hearts and minds," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, in a note.

This milestone comes just over three years after the index first hit 30,000 points, a period characterized by significant market volatility due to the COVID-19 pandemic, rising inflation, and the Fed's interest rate hikes to curb consumer prices.

The Dow's composition differs from the S&P 500 due to varying selection and weighting methods. For instance, UnitedHealth Group, the Dow's top weight as of Wednesday's close, is only the 13th most heavily weighted stock in the S&P 500. Similarly, Goldman Sachs, the Dow's second-largest weight, is not in the S&P 500's top 50. Conversely, Nvidia, Alphabet, and Meta Platforms, three of the S&P 500's top six weights, are not in the Dow.

The Dow's journey from 30,000 to 40,000 points highlights a wide performance gap among its stocks. Top performers include American Express, Caterpillar, and Microsoft, whose shares have nearly doubled since November 2020. Meanwhile, Verizon, Nike, and Intel have lost about a third of their value over the same period.