The Dow Jones Industrial Average (DJIA) experienced a reversal of fortune in 2023, slipping to third place behind the Nasdaq after outperforming it by the widest margin in two decades the previous year. The latest blow came as the Dow missed out on the rally fueled by Nvidia's blockbuster earnings, leading to the Nasdaq's largest outperformance since its inception. This underperformance has raised questions about the Dow's relevance in today's market, particularly due to its limited exposure to the current stock market frenzy surrounding artificial intelligence (AI).
Dow's Missed Opportunities
Nvidia Corp.'s impressive earnings report triggered a 24.4% surge in its shares, but the Dow failed to benefit from this rally. As a result, the Nasdaq has outperformed the Dow by more than 22 percentage points in the first 100 trading days of the year, marking the widest margin since the Nasdaq's establishment in 1971. Similarly, the S&P 500 has also surpassed the Dow by over 9 percentage points during the same period. While the Nasdaq has soared over 21% year-to-date, the Dow has struggled, experiencing a decline of approximately 1.2%.
Limited Exposure to Technology Stocks and AI
Critics argue that the Dow's underperformance can be attributed to its insufficient representation of technology stocks, particularly those related to artificial intelligence. While the Dow includes Microsoft Corp. and Apple Inc., their weighting in the index is not as substantial as in the S&P 500 and Nasdaq. This lack of exposure to AI-related companies like Nvidia, Meta Platforms Inc., Alphabet Inc., Tesla Inc., and Amazon.com Inc. has contributed to the perception that the Dow is outdated in comparison to its counterparts.
Changing Market Dynamics
Last year, the Dow seemed more appealing to investors due to concerns about de-globalization and rising energy prices, which favored certain cyclical sectors and drove up shares of oil and gas companies. However, the narrative has shifted in 2023, with fears of a recession weighing heavily on companies associated with real estate, industrials, and energy. At the same time, the AI craze has revitalized interest in the technology sector, highlighting the divergence between the Dow and the Nasdaq.
Nvidia's Dominance in the AI Space
Nvidia's extraordinary performance and its impact on the broader market cannot be overlooked. The chip-maker's shares skyrocketed by an astronomical 24.4% following its blockbuster earnings report. This remarkable surge demonstrates the growing influence of Nvidia as a leader in the artificial intelligence industry. Nvidia's graphics processing units (GPUs), which are used in data centers to support AI-enabled products and services, have become a "killer app" driving the company's revenue growth.
The Dow's Relevance
The growing disparity between the Dow and the Nasdaq, often referred to as the "new economy vs. old economy" divide, raises questions about the Dow's ability to provide a comprehensive representation of the U.S. market. Market analysts initially anticipated that the Dow would continue to outperform in 2023, but the Nasdaq's resurgence and the Dow's struggles have challenged this expectation. Despite its underperformance, some investors still find value in the Dow due to its lower price-to-earnings ratio compared to the S&P 500 and Nasdaq, suggesting that its members' expected profits may present an opportunity.
Bottom Line
The Dow Jones Industrial Average's recent underperformance against the Nasdaq reflects the changing dynamics of the market, with the rise of artificial intelligence playing a significant role. The Dow's limited exposure to technology stocks and AI-related companies has hindered its ability to capitalize on the current stock market craze. As the Dow grapples with its relevance, investors must navigate the new economy vs. old economy divide and carefully consider the implications of AI's increasing influence on the market.
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