For more than a century, Dow Jones Industrial Average (INDIKS: ^DJI) It served as a barometer measuring the health of the U.S. stock market.

When Dow Jones Officially founded on May 26, 1896, it consisted of a dozen companies, most of them affiliated with the industrial sector. Today, it has a pipeline of 30 historically profitable, time-tested, industry-leading businesses.

Over the last 128 years, this iconic index has undergone 52 significant changes, not including components changing their names or mergers of existing Dow components. latest change had happened Amazon Entering the index and pharmacy chain Walgreens Boots Alliance It goes up in February — that is, until today.

Before the proceedings begin on Friday, November 8, A new era will begin for the Dow Jones Industrial Average.

Image source: Getty Images.

Wall Street’s evergreen index shows greater interest in the AI ​​revolution

Dow Jones’ components will see 53rd change artificial intelligence (AI) leader Nvidia (NASDAQ:NVDA) Enter Dow and the legacy semiconductor company Intel (NASDAQ: INTC) Head for the exit.

Besides being late to the AI ​​party, Intel has the lowest share price in the Dow. Unlike the market-cap-weighted S&P 500 and Nasdaq Composite, where larger companies have more influence over those indexes, the Dow is a share price-weighted index. Market cap is irrelevant in the context of influencing the Dow’s point value.

Significant losses due to central processing unit market share losses as well as the Foundry division that Intel built from scratch Advanced Micro DevicesThis has made Intel a virtual factor for the 128-year-old index.

Meanwhile, Nvidia’s largest-ever stock split in June (10 for 1) It paved the way for it to become one of the 30 components of the Dow. Without this split, Nvidia would be pushing close to $1,400 per share, which wouldn’t work with the Dow’s share price-weighted formula.

Nvidia’s addition adds a new growth component to the mature stock-focused Dow, as well as positioning the index to benefit from the rise of artificial intelligence. The combination of productivity gains and consumption side effects due to the AI ​​revolution could add $15.7 trillion to the global economy by 2030, according to analysts at PwC.

Nvidia’s hardware is at the center of this excitement surrounds artificial intelligence. The H100 graphics processing unit (GPU) and next-generation Blackwell GPU are the brains behind the split-second decision-making required to run generative AI solutions and build/train large language models. Over a three-year period, Nvidia’s full-year sales are expected to grow from a reported $27 billion to an estimated $179 billion, with AI accounting for nearly all of that projected increase.

While demand for Nvidia’s solutions and pricing power for the company’s hardware remains strong, the addition of this AI leader Wall Street’s widely followed stock index faces an eventual bubble burst event.

For three decades, investors have consistently overestimated how long it will take for a game-changing technology to be adopted and/or provide widespread benefit. In each case, it resulted in a new technology or innovation failing to meet high expectations. There is nothing to suggest that AI will avoid the fate of previous major trends, including the advent of the internet. If the AI ​​bubble bursts, the Dow index will face more downside than if Intel remained in the index.

Image source: Getty Images.

A new materials industry component gains instant traction

In addition to Nvidia’s flagship addition, S&P Dow Jones Indices, the committee that votes on stocks entering and exiting the Dow, also opted for a relaunch. materials science solutions company Dow Inc. (NYSE:DOW) and replace it with the paint and coating giant Sherwin-Williams (NYSE: SHW).

The writing that Dow Inc. would be shown the door had been on the wall for a while. Following the merger with Dow Chemical in 2017 DuPontThe newly formed company (DowDuPont) eventually stated its intention: split into three separate businesses. This split occurred in 2019 and resulted in the emergence of DuPont: cortevaand Dow Inc. are all going their separate ways. Dow Inc. remained in the Dow Jones Industrial Average, which technically gave DuPont (via the spin-off) a continuous presence in the index since 1935. This situation officially ends today.

Similar to Intel, Dow Inc.’s low share price has made it a relative non-factor for the Dow Jones Industrial Average. Additionally, with the loss of the operating divisions of DuPont and Corteva, it was no longer the diversified company it once was.

With Sherwin-Williams entering the Dow today, it instantly became one of the most relevant components. The share price of $378 ranks sixth among the 30 components of this iconic index. Due to the share price difference between Sherwin-Williams and Dow Inc. as well as Nvidia and Intel, S&P Dow Jones Indices will adjust the Divisor used to convert share price into Dow points.

Being cyclical is probably the biggest investment appeal for Sherwin-Williams. Although downturns in the US economy are normal and inevitable, they tend to be short-lived. Three-quarters of the 12 recessions in the United States since the end of World War II were resolved in less than 12 months. By comparison, most growth periods span several years. This leads to increased consumer, commercial and industrial demand for the company’s products over time and also increases the company’s pricing power.

To add, Sherwin-Williams did this: Leaning on inorganic growth to expand is excellent business. While most of these acquisitions were of the spur-of-the-moment variety, management did not hesitate to acquire a major name from time to time; just as Sherwin-Williams did in 2017 when it acquired Valspar for $11.3 billion in an all-cash deal. .

The Dow Jones Industrial Average can last for years without any changes. Today, a new era begins for this iconic index.

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John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a board member of The Motley Fool. Sean Williams He has positions in Amazon, Intel and Walgreens Boots Alliance. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon and Nvidia. The Motley Fool recommends Intel and Sherwin-Williams and recommends these options: $24 short calls on Intel for November 2024. The Motley Fool has a feature disclosure policy.