Iconic for over 128 years Dow Jones Industrial Average (^DJI -0.61%) It served as a barometer of Wall Street’s health. During that time, it has grown from an index that included a dozen (mostly) industrial stocks to one that now includes 30 different, multinational businesses.

Since its official establishment on May 26, 1896, Dow Jones saw no shortage of changes. Except for mergers of existing Dow components and simple name changes, 52 separate examples where companies were added or removedThe most recent of these involved the dismantling of the pharmacy chain Walgreens Boots Alliance in favor of the e-commerce giant Amazon Towards the end of February.

Before the opening bells ring on Friday, November 8, we will witness the 53rd change in history.

Image source: Getty Images.

Welcome Nvidia! C’est la vie, Intel!

The most notable change announced after the closing bell on November 1 was that leading artificial intelligence (AI) stocks Nvidia (NVDA 0.48%) Will join Dow when strong semiconductor stock Intel (INTC -2.93%)The company, which has been part of Dow since November 1999, will be shown the door.

Nvidia completed a historic 10-for-1 stock split in June, making this addition to the Dow Jones possible. Without this split, Nvidia’s shares would be trading above $1,300 per share, which wouldn’t work with the ageless index’s share price-based formula.

There’s no doubt that Nvidia’s AI ties are what made this move possible. Orders are backlogged for the company’s H100 graphics processing unit (GPU) and its successor GPU architecture, known as Blackwell. led to extraordinary pricing power This increased Nvidia’s gross margin significantly.

Nvidia also received healthy support from the CUDA software platform. CUDA is the toolset that developers use to maximize the potential of Nvidia AI-GPUs. Although hardware sales are at the forefront, CUDA plays an important role in ensuring that the company’s customers remain loyal to its solution ecosystem.

The only concern with this addition is that Over the last 30 years, every next big trend has experienced a bubble burst in the early stages of its existence. He argues that because AI is still far from a mature technology, Nvidia, and now the Dow Jones Industrial Average, will be at risk if the AI ​​bubble bursts.

Meanwhile, Intel is falling behind on the innovation frontand he pays the price for it. Given that Nvidia has a seemingly insurmountable lead in data center GPU market share, it has a daunting task ahead.

Moreover, Intel’s vision of becoming the world’s second-largest foundry services provider by the end of the decade is a costly one. Creating the infrastructure needed to make this happen has led to some ugly losses for the former king of the semiconductor industry.

On the bright side, Intel remains the clear market share leader in central processing units (CPUs) for personal computers (PCs) – but even there some of its lead share appears to have diminished thanks to its efforts. Advanced Micro Devices.

During Intel has a way to make a comebackIt is likely to be a multi-year project. S&P Dow Jones Indices, which is responsible for making decisions about adding or removing Dow components, apparently wasn’t willing to wait for that to happen.

Hello Sherwin-Williams! Take care, Dow, Inc.!

In addition to trading semiconductor stocks, S&P Dow Jones Indices material giant Sherwin-Williams (DSI 4.59%) to the iconic index and the company that delivers materials science solutions. Dow Inc. (DOW -2.08%) to the chopping block after the close of trading on November 7.

Sherwin-Williams Known for its long list of paint and coating productssells to residential, commercial and industrial customers. Although his eponymous brand is the face of the company, he also owns the Valspar, Thompson’s WaterSeal and Krylon brands.

Materials companies tend to be highly cyclical, and Sherwin-Williams is no exception. While demand is expected to decrease during the economic crisis, the company takes advantage of the non-linearity of the economic cycle. While most recessions resolve in less than a year, the typical economic expansion lasts several years. This results in a steady increase in demand for the company’s products and increases its pricing power over time.

What’s more, Sherwin-Williams’ management team isn’t afraid to turn to acquisitions as a way to expand its reach and increase its profitability. A steady diet of impulse buys and occasional big acquisitions (for example, buying Valspar for $11.3 billion in 2017) fueled global expansion and broadened its product portfolio.

Meanwhile, breakout Dow Inc. is the smallest component of the Dow Jones Industrial Average, with a market cap of $34 billion (for context, Sherwin-Williams is a $90 billion company).

In August 2017, the then long-running Dow component DuPont Merged with Dow Chemical to form DowDuPont, a holding company focused on materials sciences, specialty chemicals/products, and agriculture. But in 2019 DowDuPont split into three separate businesses: DuPont, cortevaand Dow Inc., the latter of which remained in the Dow Jones Industrial Average. Even though it was only one-third of its previous relevance, it was only a matter of time before a suitable replacement for the Dow Inc. was found in the evergreen index.

To add fuel to the fire, Sherwin-Williams has easily outperformed Dow Inc. since DowDuPont split into three separate companies. Dow Inc. has lost 2% of its value, excluding its strong annual dividend yield of almost 6%, while Sherwin-Williams has soared by 150% since that split (not counting dividends). It is not uncommon for S&P Dow Jones Indices to launch components that cannot handle the Dow Jones.

Image source: Getty Images.

Share price matters in the Dow Jones Industrial Average

Aside from companies entering and exiting the Dow before trading begins on Friday, November 8, the second change that will occur is as follows: Divisor of Dow.

Criterion S&P 500 and growth oriented Nasdaq Composite Both are market cap weighted indices. This means that companies with larger market capitalization have more influence on these two indices.

For example, the world’s largest publicly traded company, Apple ($3.37 trillion market cap), if it rises or falls by 5%, it must have a greater impact on the S&P 500 than the smallest component of the index, corvo ($6.8 billion market cap), increases or decreases by 5%.

Dow Jones Industrial Average is a stock price weighted index. In other words, market value is irrelevant. The only thing that matters and is ultimately responsible for determining whether the point value of the index is the total share price of its 30 components. Their impact was minimal, as Intel and Dow Inc. had two of the three lowest stock prices on the Dow Jones as of the Nov. 1 close.

The new constituents, Nvidia and Sherwin-Williams, would rank between the 22nd and sixth most influential companies in the Dow based on their share prices on Nov. 1.

However, Nvidia/Intel and Sherwin-Williams/Dow Inc. To account for large share price differences between companies, S&P Dow Jones Indices will need to adjust the Dow Divisor, which converts a company’s share price into Dow points.

In just a few days, the timeless Dow Jones Industrial Average will take on a completely new look.