Dow 50,000: Five Reasons It Is a Feckless Milestone

Editors’ Note: MarketMinder doesn’t make individual security recommendations. Those mentioned here merely represent the broader theme we wish to highlight.

The Dow Jones Industrial Average hit 50,000 last Friday! Huzzah! Cue the cheering about America’s oldest stock index reaching another big, round number. But before you go out to get your customary hat and t-shirt, a friendly reminder: The Dow is a broken index. We aren’t being haters—here are five reasons why Dow 50,000 is meaningless.

The Dow Is Price-Weighted

The Dow’s fatal flaw stems from its construction: It is a price-weighted index (along with Japan’s Nikkei 225). Using a constituent’s stock price to determine its index weight makes little sense given price alone says nothing about a company’s heft. Rather, it is a reflection of share count. A big company may have many shares outstanding because it decided to split its stock—a way to make shares more affordable for regular investors. Similarly, a small firm may have fewer shares outstanding, which makes each share more expensive.

But fundamentally, share counts don’t change anything about a company’s total dollar value. Say you hold shares of Company ABC. Owning one share at $100, two shares at $50 or four shares at $25 doesn’t change the value of your ownership stake. In all cases, you would have $100, and the company’s market value (share price times number of shares outstanding) wouldn’t change. Some argue divisor adjustments in index construction mitigate splits’ impact. This is wrong, as Fisher Investments’ founder and Executive Chairman Ken Fisher showed in The Only Three Questions That Count.

But for the Dow, price drives everything, rendering strange outcomes. For instance, retailing giant Walmart and paint manufacturer Sherwin-Williams are both Dow members. The former’s market cap ($1 trillion) is more than 10 times the latter’s ($90 billion).^[i] It stands to reason the bigger company would influence the index’s direction more than the smaller one. Right? Sound sensible?

Yet that isn’t the case in the Dow. Sherwin-Williams’s price ($364) gives it the fifth-largest weighting in the index (4.5%) while Walmart’s price ($129) gives it a 1.6% share, 24^th out of the Dow 30.^[ii] Or consider how chip manufacturer Nvidia—and its world-leading $4.6 trillion market cap—has the 20^th largest weighting, behind industrial company Honeywell International (market cap of $152 billion) and McDonalds (market cap of $232 billion).^[iii]

Moreover, the focus on price misses a huge part of total return: reinvested dividends. When a company pays a dividend, that payout is deducted from the share price (a good reminder that dividends are return of investment, not return on investment). Investors can receive this dividend or choose to reinvest it—and a total return index will reflect the latter. But the Dow’s price-only methodology means it doesn’t reflect this reinvested dividend. Instead, since dividends detract from share price, those payouts actually penalize the Dow’s returns.

An Arbitrary Selection Process

One can argue any index inclusion criteria are arbitrary (see how a new company joining the S&P 500 must have a market capitalization of at least $22.7 billion).^[iv] But the Dow’s process is rather opaque. Besides lacking a regular rebalance schedule, stock selection goes through a committee. Representatives from S&P Dow Jones Indices and The Wall Street Journal choose US-based firms with an “excellent” reputation and “capacity for sustained growth that are well-followed by investors.”^[v] That sounds pretty ambiguous to us, and recent history illustrates some issues. Consider, Nvidia’s market cap hit $2 trillion in February 2024 and then $3 trillion a few months later in June.^[vi] Despite becoming the world’s largest company by market cap, the Dow didn’t include the chip maker in its index until November 2024.^[vii] This raises questions around what the squishy criteria actually mean—if anything.

Just 30 Firms

The Dow has only 30 companies, which wouldn’t be abnormal if America had a small equity market. See Belgium’s BEL-20’s 20 firms, Netherlands’ AEX Index’s 25 or Singapore’s Straits Times Index’s (STI) 30 companies.^[viii] But America has the world’s largest stock market, which other indexes better represent. The widely watched S&P 500 has 500 companies with a combined market cap of nearly $60 trillion.^[ix] The market cap of the Russell 3000 and its approximately 3,000 firms (covering approximately 98% of investable US shares)? Almost $67 trillion.^[x] The FT Wilshire 5000 Index, which aims to reflect all actively priced US stocks and has over 3,400 constituents, boasts a combined market cap of $70.2 trillion.^[xi] The Dow’s 30 firms and $22 trillion in market cap don’t compare.^[xii]

Odd Structure

On top of that, the Dow is oddly structured by sector. The Global Industry Classification Standard (GICS) establishes 11 equity sectors, and the Dow omits two of them (Utilities and Real Estate). Now, these sectors aren’t huge swaths of US or global markets. Utilities represents just 2.2% of the S&P 500 and 2.6% of the MSCI World while Real Estate is only 1.9% of both indexes.^[xiii]

But there are bigger disconnects. On a market cap basis, Information Technology is America’s largest sector today, comprising 33.4% of the S&P 500—far exceeding the Dow’s 18.6%.^[xiv] (The Dow’s largest sector is Financials at 27%.) Not fully reflecting the influence of America’s giant Tech and Tech-like firms has contributed to the Dow’s lagging the S&P 500’s price return since this bull market began in October 2022: 71.8% to 94.1%.^[xv]

Scaling the Milestones

Dedicated MarketMinder readers may think they have read this article already, which is true to some degree—we wrote about Dow 40,000 two years ago. But that actually makes another point: These milestones are becoming less and less impressive when you do the math. The climb from 30,000 to 40,000 took four years and reflects a gain of 33%. The Dow climbed 25% in a little less than two years—not exactly a gangbusters return—to go from 40,000 to 50,000. To hit the next big round number of 60,000, the Dow will need to rise 20%, which is akin to an average bull market year. Yawn.

For all the talk about the Dow’s going from below 6,600 at the depths of the 2007 – 2009 bear market to 50,000 today, the gain itself is around 658%. Yet the S&P 500 Total Return Index delivered a return of over 1315%, nearly doubling the Dow’s, over the same timeframe.^[xvi] To us, that highlights the importance of including reinvested dividends and using a properly constructed, diversified index.