IBM, Verizon and Merck stocks lead the Dow to new highs

newspaper photo with the words Dow Stocks clearly visible;  glasses placed on paper

Key points

  • The S&P 500’s market cap weighting does not fully reflect the strength of Dow leaders IBM, Verizon, Merck and Travelers.
  • Reliable stocks like Coca-Cola and 3M contribute to the Dow’s traditional role as a market indicator.
  • Dow stocks Apple, Microsoft, Salesforce and Amgen benefit from emerging trends such as artificial intelligence, cloud computing and drug development.
  • 5 stocks we like best from Alphabet

You don’t hear as much about the Dow Jones Industrial Average as investors did a few decades ago, as the broad consensus has held the S&P 500 to be a better indicator of market conditions.

But the Dow is climbing back to all-time highs, led by International Business Machines New York Stock Exchange: IBMVerizon Communications Inc. New York Stock Exchange: VZMerck & Co. Inc. NYSE:MRK and perhaps an unlikely leader, insurance giant The Travelers Companies, Inc. New York Stock Exchange: TRV.

These first three components, coming from technology stocks, telecom stocks and pharmaceutical stocks, make sense, as those areas have been in growth mode.

But insurance?

Overall, the decidedly unglamorous insurance industry is in crisis. The US iShares Insurance ETF NYSEARCA: THURSDAY it advanced 6.85% in January.

Dow major stock gaps widen

Before we look at the internal characteristics of the Dow itself and whether it has become a relevant market indicator lately, take a look at the Travelers Companies chart. The stock jumped 6.72% on Jan. 19, as the company reported core revenue more than doubled as premiums and investment income rose, while catastrophe insurance payouts fell.

Personal insurance premiums rose 13% as customer rates increased.

Travelers shares began rising in late October and posted a three-month gain of 32.01% and a January gain of 10.83%.

Sure, Travelers looks like a good stock at the moment, as it’s trading at new highs and analysts expect double-digit earnings growth this year and next.

S&P Weightings of Dow Gainers

But its performance as a Dow leader is instructive, when considered in the context of other top performers such as IBM, Verizon and Merck.

Here’s where these four stocks rank in terms of weighting in the S&P 500:

  • IBM: 0.42%
  • Verizon: 0.43%
  • Merck: 0.75%
  • Travellers: 0.12%

One can easily see that none of these are likely to dent the S&P’s performance to the level of tech stalwarts and index heavyweights Microsoft Corp. NASDAQ:MSFTThe Apple company. NASDAQ:AAPLNvidia Corp. Inc. NASDAQ: AMZNAlphabet Inc. NASDAQ:GOOGL and Meta Platform Inc. NASDAQ: META.

The influence these stocks have on the performance of the S&P has been well documented. Like the Dow, the S&P 500 is also trading at new highs, led by the artificial intelligence business of stocks including Nvidia, Juniper Networks Inc. NYSE: JNPR and Advanced Micro Devices Inc. NASDAQ:AMD.

Is the Dow an indicator of market strength?

But this brings us back to the question of whether the Dow has renewed value as a market indicator.

The S&P’s market cap weighting does not reflect the strength of IBM, Verizon, Merck and Travelers in its overall return. That likely puts the Dow in a position to more accurately indicate market breadth beyond a handful of stocks rising on the promise of artificial intelligence.

It may seem antiquated to consider the Dow as a market indicator. This makes sense, given the Dow’s inclusion of reputable stocks like Coca-Cola Co. NYSE: KO and 3M Co. New York Stock Exchange: MMMwith less dependence on fast-growing and younger-growth stocks.

Despite its smaller size than the S&P 500, the Dow’s 30-stock concentration gives it some value as a snapshot of traditional blue-chip stock movements.

Dow also tracks market growth themes

At this juncture, that’s not a bad indicator of market health, outside of stocks rallying on gains from hot investment themes, including artificial intelligence, cloud computing and anti-obesity drugs. All of these offer a compelling investment thesis, but represent very select corners of the market.

That’s not to say there aren’t Dow stocks benefiting from these trends. For example, Apple, which bounced back in 2023 despite not being a player in AI, is receiving new attention for its AI efforts and the launch of its Vision Pro spatial computing headset.

Dow Components Microsoft and Salesforce Inc. New York Stock Exchange: CRM are present in both artificial intelligence and cloud computing, and Amgen Inc. NASDAQ: AMGN is on the rise due to its applications of artificial intelligence in the field of drug discovery, as well as its advances in cancer treatment.

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