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The Dow Jones Industrial Average (DJI) hasn’t fallen this far behind the S&P 500 (GSPC) in a given year since the dot-com bubble, according to new research from DataTrek.
The Dow is up just shy of 9% this year. The benchmark S&P 500 has doubled that, rising almost 19%. The difference is the most it’s been since 2000.
As with most things that have underperformed the S&P 500 during 2023, the difference has been exposure to the “Magnificent Seven” tech stocks — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA).
Just two of those companies, Apple and Microsoft, are in the Dow. The index has a less than 20% exposure to the information technology sector. The S&P 500, meanwhile, is 40% technology stocks, including all of the Magnificent Seven.
“The S&P’s outsized weighting in tech has enabled it to outperform as they have all the key ingredients to do so: global, scalable businesses that dominate their respective industries,” DataTrek’s co-founders Nicholas Colas and Jessica Rabe wrote in a new research note on Wednesday night. “They are also enablers of the ‘next big thing’ relative to gen AI. The power of disruptive innovation is a structural trend that is unlikely to reverse course.”
A chart recently released by Goldman Sachs exemplified how the Magnificent Seven have helped drive the S&P 500’s performance this year.
Interestingly, the last time the Dow lagged the S&P 500 by this much it was actually a bullish sign for the index, which outperformed the S&P 500 in 2001 and saw more upside when the market turned around in 2003. This also played out recently in the fallout from the 2020-2021 tech surge, which was followed by Dow outperformance in 2022.
To the DataTrek team, whether history will repeat itself hinges on a call surrounding tech stocks. The outperformance could indicate investors are over-extended in tech stocks, and some of the Dow’s components will catch a bid as investors flow out of the names that led in 2023. Or it could mean tech has just become so dominant that the outlook for other sectors isn’t as promising.
“2024 is a make or break year for non-tech names to prove they still have relevance, as they have many tailwinds in their favor from easier monetary policy to potential reversion to their long run mean returns,” the DataTrek team wrote. “For us, as much as tech has had a fantastic run, we’re not ready to throw in the towel on the group.”
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