Despite its limited scope of just 30 components, the Dow Jones Industrial Average remains a trusted barometer of the market, offering insights into broader market trends.
The Dow’s components, comprising leading companies across various industries, serve as representatives of their respective sectors. Over time, the index has adapted to reflect evolving market dynamics, gradually embracing a more technology-focused composition. Notable additions include Microsoft and Intel in 1999, followed by Apple’s inclusion in 2015 and Salesforce’s addition in 2020. In February, Amazon replaced Walgreens Boots Alliance, further accentuating the index’s tech orientation.
Given the accelerating pace of change, it’s plausible to anticipate the incorporation of the remaining “Magnificent Seven” stocks into the Dow by 2030. This evolution could entail replacing existing components with companies better aligned with contemporary market trends.
Alphabet for IBM
Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) has long held a position as one of the market’s most valuable companies. However, its eligibility for inclusion in the Dow was limited until its stock split in July 2022.
While stock splits typically have no bearing on the S&P 500 or the Nasdaq Composite due to their market cap-weighted structures, the Dow’s price-weighted methodology makes stock price a critical determinant of a stock’s influence in the index. With UnitedHealth Group at the top end around $476 per share and Verizon at the lower end around $39.50, Alphabet’s pre-split price of around $135 placed it below the index’s median.
The addition of Amazon to the Dow, coinciding with its stock split in June 2022, underscored the index’s openness to industry-leading companies with prices near the median. At its pre-split price, Alphabet would have a below-average weighting, potentially mitigating excessive tech sector dominance in the index. This move also paved the way for future inclusions from the “Magnificent Seven.”
Alphabet’s strengths, particularly in its cloud business unit, align with those of International Business Machines (NYSE: IBM), making it a compelling replacement. Alphabet’s superior overall business performance and broader economic representation further support its candidacy.
Furthermore, the Dow’s current underrepresentation of the communications sector, accounting for just 2.5% compared to 88.7% in the S&P 500, calls for better acknowledgment of its significance. Alphabet, with its robust presence in search, social media, and digital advertising through Google and YouTube, offers a fitting solution. Additionally, as one of the top players in cloud infrastructure alongside Amazon Web Services and Microsoft Azure, Alphabet’s inclusion would reflect the evolving landscape of technology and business.
Meta Platforms for Verizon
To better reflect the communications sector, let’s consider replacing Verizon with Meta Platforms in the Dow. Currently priced below $40 per share, Verizon holds the lowest weighting in the index. In contrast, Meta Platforms, with shares priced around $505, would become the most valuable company in the Dow upon inclusion. However, to align with the index’s methodology, Meta Platforms could pursue a 3-for-1 or 4-for-1 stock split to ensure a more reasonable weighting.
Meta Platforms commands significant influence in the realms of social media and digital advertising through its platforms Facebook, Instagram, and WhatsApp. These platforms offer coveted digital real estate for advertisers worldwide. Moreover, Meta Platforms allocates substantial resources to research and development, particularly in its Reality Labs segment, positioning the Dow to tap into emerging themes such as virtual reality.
By replacing Verizon with Meta Platforms, the Dow would gain enhanced exposure to the evolving communications landscape, reflecting the growing importance of social media, digital advertising, and emerging technologies.
Nvidia for Intel
The simplest swap on the list would involve replacing Intel in the Dow with Nvidia (NASDAQ: NVDA). Despite being added to the index 25 years ago, Intel has yet to reclaim the sky-high prices it reached during the Dot-com bubble. Moreover, it doesn’t even rank among the top-five most valuable semiconductor companies today.
In contrast, Nvidia stands out as the undisputed leader in the semiconductor industry, with a significant presence in artificial intelligence (AI) technologies. As AI continues to gain prominence, akin to social media or mobile phones, having a representative AI stock in the Dow seems imperative, and Nvidia fits the bill perfectly.
For Nvidia to join the Dow, a stock split would be necessary, ideally a 5-for-1 split at minimum. However, there’s already speculation about such a move. At its current price of just $44 per share, Intel holds the second-lowest weighting in the Dow. To maintain balance, it would be beneficial for Nvidia to consider a more substantial split, perhaps a 10-for-1 split, to ensure its share price falls below $100.
By replacing Intel with Nvidia, the Dow would not only gain exposure to a leading semiconductor and AI company but also better reflect the evolving landscape of technology and innovation.
Tesla for Dow
General Motors’ removal from the Dow following its Chapter 11 bankruptcy filing in 2009 left a void in representing the auto industry within the index. While Tesla (NASDAQ: TSLA) is not currently part of the Dow, its potential inclusion hinges on the broader adoption of electric vehicles (EVs) in the automotive market.
According to a notable prediction by the International Energy Agency in September 2022, EVs are projected to constitute 60% of global vehicle sales by 2030. Should Tesla maintain its position as a market leader in this transition, it could warrant consideration for inclusion in the Dow. Notably, the Dow typically comprises global leaders, and with no other American car company poised with similar potential, Tesla emerges as a viable candidate.
Replacing commodity chemical company Dow (NYSE: DOW) with Tesla presents a nuanced decision. Although Dow, the chemical company, bears no relation to the Dow Jones Industrial Average, it is a component of the index. Tesla’s inclusion would signify a departure from traditional automotive representation to encompass broader themes such as renewable energy and environmental, social, and governance (ESG) considerations.
Tesla’s diversified operations, including its foray into renewable energy and complex supply chain for battery production, align with modern industrial trends. As the auto industry shifts towards electrification, Tesla’s representation would reflect this pivotal transformation, offering exposure to EVs and other ESG-related themes.
While Tesla’s replacement for Dow in the Dow Jones Industrial Average presents challenges due to the significant disparity in share prices, its potential to represent multiple industries and emerging trends underscores its candidacy for future inclusion in the index.
A changing economy
The Dow Jones Industrial Average, despite its name, has evolved beyond its historical focus on industrial companies. Today, the industrial sector constitutes just 14.2% of the index. Instead, the Dow serves as a representative sample of the broader market, encompassing diverse industries and sectors.
The “Magnificent Seven,” comprising leaders in industries poised for sustained growth over the coming decades, hold significant value within the market. These companies represent key pillars of innovation and progress, shaping the future landscape of various sectors.
While the specifics of stock swaps and timing of potential stock splits may vary, it’s highly likely that the composition of the Dow will undergo significant changes by 2030. As industries evolve and new trends emerge, the Dow will reflect these shifts, adapting to encompass the most influential and promising companies of the time.
