The excitement of the Dow Jones Industrial Average reaching 40,000 for the first time now seems like a distant memory. The index has since dropped over 3%, experiencing its sharpest two-week decline in over a month, while the rest of the market has continued to rise.
Despite holding on to about a 2% gain in May, the 30-stock DJIA has significantly lagged behind the tech-heavy Nasdaq Composite COMP by the widest margin since May 2023. It has also underperformed the large-cap benchmark S&P 500 SPX by the largest margin in three months, according to Dow Jones Market Data.
The Nasdaq rose 6.9% in May, marking its best month since November, while the S&P 500 gained 4.8%, achieving its biggest monthly increase since February, as per Dow Jones Market Data.
Market analysts advise investors not to rely solely on the Dow’s decline from its record high to evaluate stock-market performance in May. While some mega-cap tech companies have made way for previously overlooked sectors like utilities and small-cap stocks, this may not be the rotation investors were hoping for, the analysts noted.
The recent downturn in the Dow industrials has been driven by several factors, including weak quarterly earnings reports from Salesforce Inc. CRM, which saw its shares plummet nearly 20% on Thursday, experiencing its worst day in two decades. This drop alone cut around 350 points from the blue-chip index on Thursday, according to Dow Jones Market Data.
Robust U.S. economic data and weak government debt auctions have driven longer-term Treasury yields higher, increasing pressure on the stock market. This has raised concerns that the Federal Reserve may not be able to lower interest rates later this year despite falling inflation.
James Ragan, director of wealth management research at D.A. Davidson, noted, “Since the Dow reached its all-time high of 40,000, the market has narrowed with tech stocks leading the rally in recent weeks. The Dow has about an 18% weighting in technology stocks, whereas the S&P 500 has over 30%.”
The Dow’s significant downturn compared to other major indexes is partly because it is a price-weighted index, unlike the S&P 500, which is market cap-weighted and gives more influence to larger companies. The 30-stock Dow is more sensitive to share price movements.
For instance, UnitedHealth Group, with a stock price above $490 and a market valuation of $443 billion, holds the largest position in the Dow at 8.3%. In contrast, Amazon.com, trading around $180 per share with a market cap near $1.9 trillion, represents only 3% of the Dow’s overall weighting, according to FactSet data.
Nvidia Corp. NVDA, -0.78%, which saw a 27% monthly gain and finished above $1,096 per share on Friday, was one of the top performers in the S&P 500 and the Nasdaq for the month, but it is not a Dow component.
As a result, any stock in the Dow could have a much greater chance to influence the average, said JJ Kinahan, chief executive of IG North America and president of the brokerage tastytrade.
He added that Dow Jones is “a great guide” for an average investor, but the S&P 500 and the Nasdaq are “probably a better reflection” of the stock market and the U.S. economy because of the number of stocks they track.
Stock rally expands into utilities and small-caps
While some of the megacap technology firms like Nvidia maintained their leading roles in the rally, others have begun ceding space to previously overlooked market contenders like utilities and small-cap stocks. This shift might be indicative of investors rotating their positions and easing up on some of the lagging sectors, Kinahan told MarketWatch via phone on Friday.
Utility stocks in May left the rest of the market in the dust. The Utilities Select Sector SPDR Fund XLU emerged as the top performer among the 11 SPDR ETFs tracking the S&P 500 sectors. It surged nearly 9% this month, logging its largest monthly gain since March 2022, according to FactSet data.
The Fed’s interest rate cut outlook, coupled with rising demand for electricity driven by artificial intelligence chips and software, has made the traditional defensive sector of the market increasingly appealing.
Small-cap stocks, as tracked by the Russell 2000 index RUT, surpassed the large-cap S&P 500 and the Dow with a 4.9% monthly gain. It was their best month since February, according to FactSet data.
Consumer-discretionary stocks lag
In terms of what trailed the broader market in May, the S&P 500 energy XLE and consumer-discretionary sectors XLY were two of the worst-performing corners of the index, with their ETFs down 0.3% and eking out a gain of 0.2%, respectively, according to FactSet data.
Some of the biggest retailers and restaurant chains tumbled in May, with shares of McDonald’s Corp. MCD, +2.71% and Target Corp. TGT, +4.20% off 5.2% and 3%, respectively, amid weakness in sales of discretionary items as consumers try to adjust to a new normal of much higher prices.
“The retailers are a wild picture in terms of how well the companies are performing, so there’s been a lot of volatility,” Kinahan said. “You have T.J. Maxx [earnings] TJX, -0.26%, which has been doing alright, but you have McDonald’s, which has been all over the place with the pricing wars, and you have Tesla Inc. TSLA, -0.40% in there, which is an element of volatility to that sector.”
Why market breadth may not improve
However, the outperformance of some of the previous laggards doesn’t necessarily confirm an improvement in overall stock-market breadth, said Ragan of D.A. Davidson.
The information-technology sector XX:SP500.45 within the S&P 500 was up nearly 12% since logging one of its 2024 lows on April 19, while the index overall was up only 5% over the same period, according to FactSet data.
“We’ve been concerned. It seemed like over the last six-week period the gains have been much more narrow in these tech-centric companies, and we want to see more broadening that sustains…,” Ragan told MarketWatch in a phone interview. “May has ended with more concentration [in tech] than we saw in the early part of the month.”
Both the Technology Select Sector SPDR Fund XLK and Communication Services Select Sector SPDR Fund XLC scored their best monthly performance since November, according to Dow Jones Market Data.
U.S. stocks finished mostly higher on Friday after the April personal-consumption expenditures index inflation gauge reading came in around expectations. The Dow industrials advanced 1.5% on Friday, while the S&P 500 was up 0.8% and the Nasdaq finished nearly flat, according to FactSet data.
