For over 128 years, the Dow Jones Industrial Average (DJINDICES: ^DJI) has been a leading indicator of Wall Street’s performance. It has transformed from an index of 12 primarily industrial stocks to a collection of 30 diverse multinational corporations.
Since its official launch on May 26, 1896, the Dow has experienced numerous changes. Excluding mergers and name changes, there have been 52 instances of companies being added or removed. The latest shift saw pharmacy chain Walgreens Boots Alliance replaced by e-commerce giant Amazon at the end of February.
As we approach the market opening on Friday, Nov. 8, another significant change is on the horizon.
Image source: Getty Images.
A New Era Begins: Welcome Nvidia, Goodbye Intel
The most notable change, announced after trading closed on Nov. 1, involves the addition of Nvidia (NASDAQ: NVDA) to the Dow. This comes at the expense of Intel (NASDAQ: INTC), a Dow component since November 1999.
Nvidia’s recent 10-for-1 stock split in June enabled its entry into the Dow. Without this adjustment, Nvidia’s stock price would have exceeded $1,300 per share, posing difficulties for the index’s pricing formula.
Nvidia’s strength stems from the high demand for its artificial intelligence (AI) technology. The company’s H100 graphics processing unit (GPU) and its next-generation architecture, known as Blackwell, have considerable order backlogs, granting Nvidia strong pricing power and increased gross margins.
The success of Nvidia’s CUDA software platform, which helps developers harness the potential of its AI GPUs, is also noteworthy. While hardware sales capture attention, CUDA fosters customer loyalty to Nvidia’s ecosystem.
However, concerns remain. Historically, emerging trends like AI have faced bubble-bursting challenges early on. This casts a shadow over both Nvidia and the Dow Jones Industrial Average, especially as AI is still developing.
On the other hand, Intel has struggled to innovate and faces significant challenges. With Nvidia dominating the data center GPU market, Intel’s ambitions to become the second-largest foundry services provider by the end of the decade require costly investments, leading to substantial losses for the once-dominant semiconductor firm.
Despite leading the market in central processing units (CPUs) for personal computers, Intel has lost ground to competitors like Advanced Micro Devices.
Although Intel possesses a potential path to recovery, it appears to be a lengthy process. S&P Dow Jones Indices decided not to wait for Intel’s resurgence before making this change.
New Addition: Sherwin-Williams Takes the Stage
In another notable shift, S&P Dow Jones Indices is set to add Sherwin-Williams (NYSE: SHW) to the Dow while removing Dow Inc. (NYSE: DOW) after trading ends on Nov. 7.
Sherwin-Williams is widely recognized for its extensive range of paint and coating products sold to various clients, including those in residential, commercial, and industrial sectors. The company also owns well-known brands such as Valspar, Thompson’s WaterSeal, and Krylon.
Like many materials companies, Sherwin-Williams experiences cyclical demand. While economic downturns typically hurt sales, the company benefits from the longer duration of economic recoveries, leading to steady demand growth and increased pricing power over time.
Sherwin-Williams has also effectively used acquisitions to expand its market presence. A combination of smaller purchases as well as larger ones, such as the $11.3 billion acquisition of Valspar in 2017, has enhanced its global reach and diversified its product offerings.
On the flip side, Dow Inc. currently holds the title of the smallest component in the Dow, with a market capitalization of $34 billion, compared to Sherwin-Williams, which stands at $90 billion.
The transformation of Dow Inc. traces back to August 2017 when longtime component DuPont merged with Dow Chemical to create DowDuPont. This holding company focused on material sciences, specialty chemicals, and agriculture. However, in 2019, DowDuPont split into three distinct entities: DuPont, Corteva, and Dow Inc., the latter maintaining its place in the Dow. With diminished relevance, it became inevitable for Dow Inc. to be replaced.
Furthermore, Sherwin-Williams has significantly outperformed Dow Inc. since the split. While Dow Inc. has seen a 2% decline in value, excluding its annual dividend yield of nearly 6%, Sherwin-Williams has surged by 150%, also excluding dividends. It is common for S&P Dow Jones Indices to remove companies that do not contribute positively to the Dow’s performance.
Image source: Getty Images.
As companies transition in and out of the Dow, share price remains a crucial factor…
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Downsizing in the Dow: A Major Shift in Components Set for November
As trading resumes on Friday, Nov. 8, the Dow Jones Industrial Average will undergo its second significant change, specifically involving the Dow’s Divisor.
Understanding the Indexes: S&P 500 and Nasdaq Composite
The benchmark S&P 500 and the tech-focused Nasdaq Composite are both market cap-weighted indexes. This means that larger companies have a greater impact on these indexes.
For example, if the world’s largest publicly traded company, Apple ($3.37 trillion market cap), experiences a 5% shift in its stock price, it will influence the S&P 500 more than if a smaller component, Qorvo ($6.8 billion market cap), sees the same percentage change.
The Unique Structure of the Dow Jones Industrial Average
In contrast, the Dow Jones Industrial Average is a price-weighted index. Here, the size of a company’s market cap does not matter. Instead, the overall share price of its 30 components determines the index’s point movements. Since both Intel and Dow Inc. had among the lowest share prices in the Dow as of the Nov. 1 close, their impact was limited.
The two new entrants, Nvidia and Sherwin-Williams, will rank as the 22nd and sixth most-influential companies in the Dow based on their share prices from Nov. 1.
Adjusting the Dow Divisor
To align with the significant price disparities between Nvidia/Intel and Sherwin-Williams/Dow Inc., S&P Dow Jones Indices will adjust the Dow’s Divisor. This calculation is crucial, as it translates share prices into Dow points.
A New Era for the Dow Jones Industrial Average
In just a few days, the iconic Dow Jones Industrial Average will bear a fresh appearance, signaling potential shifts in market dynamics.
User interest is drawn toward potential growth opportunities in tech and innovation domains.
See three companies poised for growth »
*Stock Advisor returns as of November 4, 2024
John Mackey, the former CEO of Whole Foods Market (an Amazon subsidiary), serves on The Motley Fool’s board of directors. Sean Williams has stakes in Amazon, Intel, and Walgreens Boots Alliance. The Motley Fool also has investments in and recommends Advanced Micro Devices, Amazon, Apple, and Nvidia. They advise on Intel, Qorvo, and Sherwin-Williams, and recommend the following options: short November 2024 $24 calls on Intel. The Motley Fool follows a disclosure policy.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.
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