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Changing Times for the Dow: Will It Outperform in 2025?
The historic Dow Jones Industrial Average (DJINDICES: ^DJI) has undergone significant shifts recently. In 2020, Salesforce (NYSE: CRM), Amgen, and Honeywell International joined the index, replacing ExxonMobil, Pfizer, and Raytheon Technologies (now RTX). In February, Amazon (NASDAQ: AMZN) took the place of Walgreens Boots Alliance. Later in November, Nvidia (NASDAQ: NVDA) and Sherwin-Williams replaced Intel and the chemical giant, Dow.
The rise of Salesforce and the recent additions of Amazon and Nvidia have shifted the Dow towards a tech-focused economy, moving it away from its previous concentration on dividend-paying, value stocks. This transition raises questions about how we define blue-chip stocks today.
Currently, the Dow is up 18.5% year-to-date, while the S&P 500 (SNPINDEX: ^GSPC) and the Nasdaq-100 have posted gains of 27.7% and 28.5%, respectively. With Amazon and Nvidia now part of the Dow for a complete year, investors are curious if the Dow could surpass these indexes in 2025. Notably, the Dow consists of only 30 components compared to the S&P 500’s 503 and the Nasdaq-100’s 101, which focuses on the largest non-financial companies in the NASDAQ Composite.
Understanding what it would take for the Dow to surpass the S&P 500 and Nasdaq-100 next year is crucial, especially considering how performance from Nvidia and Amazon might unexpectedly affect the Dow’s standing.
Image source: Getty Images.
The Inner Workings of Indexes
The Dow, as a price-weighted index, allocates more influence to companies like Salesforce compared to the S&P 500 and Nasdaq-100, which use market capitalization for weighting. This means that a company with the same market cap could have a different impact based on its share price in the Dow. For example, Nvidia, a giant in market cap, is weighted less in the Dow simply due to its lower share price. Stock splits further complicate this, affecting how shares are weighted.
Moreover, the Nasdaq-100 does not include Salesforce and overlooks significant credit card companies and balanced organizations such as IBM, Disney, and Nike. Yet these companies are established on the New York Stock Exchange (NYSE) and thus excluded from the Nasdaq-100. Similarly, Oracle, with a market cap over $530 billion, is absent from the Nasdaq-100 due to its NYSE listing.
Assessing Nasdaq-100’s Edge
Large firms like Apple, Nvidia, Microsoft, and Amazon dominate the Nasdaq-100. However, many Dow components carry higher weight than the equivalents in other indexes. To outshine both the S&P 500 and Nasdaq-100 in 2025, it is imperative that the better-weighted Dow companies excel. Many have already been doing well; for instance, Goldman Sachs has gained 55.5% thus far in the year. Caterpillar and Home Depot, also vital Dow players, are nearing all-time highs with increases of 33.6% and 24.4%, respectively.
Historically, during robust market years, the Nasdaq-100 has outperformed the Dow. Conversely, in downturns like 2022, the Dow’s focus on stable, value-oriented stocks helped it limit losses.
|
Total Return |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 (as of Market Close Dec. 6) |
|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nasdaq-100 |
19.4% |
9.8% |
7.3% |
33% |
0% |
39.5% |
48.9% |
27.5% |
(32.4%) |
55.1% |
28.3% |
|
S&P 500 |
13.7% |
1.4% |
12% |
21.8% |
(4.4%) |
31.5% |
18.4% |
28.7% |
(18.1%) |
26.3% |
29% |
|
Dow Jones Industrial Average |
10% |
0.2% |
16.5% |
28.1% |
(3.5%) |
25.3% |
9.7% |
21% |
(6.9%) |
16.2% |
20.9% |
Data source: YCharts.
The addition of Nvidia and Amazon is likely to reduce discrepancies between the Dow and other indexes, especially since both Microsoft and Salesforce hold greater weight in the Dow compared to the S&P 500 and Nasdaq-100. Despite this, it remains probable that the Nasdaq-100 will lead during periods driven by growth in large-cap stocks.
Leveraging Index Knowledge
Ultimately, for individual investors, which index is performing best is less critical. The focus should be on meeting your own financial objectives. Understanding the key components of major indexes and what shapes market trends can help investors discern valuable insights while cutting through the clutter. It also exposes gaps within these indexes, like notable growth stocks absent from the Nasdaq-100 or the Dow’s unique structure. Familiarity with the indexes bears significance since they frequently appear in financial discussions, akin to a scientist knowing elemental properties by heart.
Numerous index funds are available, allowing investors to track the performance of these major indexes.
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Exploring Investment Options: ETFs vs. Individual Stocks
While many investors focus on major indexes like the S&P 500, Nasdaq-100, or the Dow, it’s worth considering low-cost exchange-traded funds (ETFs) as another option. For example, both the Vanguard Growth ETF and the Vanguard Value ETF offer exposure to companies listed on the Nasdaq and NYSE, with a minimal expense ratio of just 0.04%.
In today’s landscape of low-cost and no-cost trading, creating a diversified portfolio is more accessible than ever—even for small investments. By selecting stocks and ETFs that align with your risk tolerance and interests, investors can build a portfolio that suits their needs.
While tracking market indexes can provide useful insights, remember that they do not have to dictate your investment choices.
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John Mackey, the former CEO of Whole Foods Market (an Amazon subsidiary), serves on The Motley Fool’s board of directors. American Express is an advertising partner of Motley Fool Money. Daniel Foelber holds positions in Caterpillar, Nike, and Walt Disney, in addition to options in Nike. The Motley Fool has stakes in and recommends Amazon, Apple, Goldman Sachs Group, Home Depot, Intel, Microsoft, Nike, Nvidia, Oracle, Pfizer, Salesforce, the Vanguard Growth ETF, Vanguard Value ETF, Visa, and Walt Disney, while also recommending Amgen, IBM, RTX, and Sherwin-Williams. The Motley Fool also provides insight on various options. For further details, refer to the disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
