Dow Outpaces S&P as Stock Rally Spreads to Old-School Industries

(Bloomberg) -- The old-economy Dow Jones Industrial Average has started beating the broader S&P 500 Index as 2023's tech-fueled rally began to fizzle in the second half of the year.

Investors typically are advised to regard milestones like the Dow's 13-session winning streak, its longest in 35 years, or that the index is sitting around 3% from a record high with a dollop of skepticism. But this flip appears to be sending a bigger message about what's going on in the market underneath the recent turmoil spinning out of Fitch Ratings' downgrade of US government debt this week. 

“The current move in the Dow indicates a broadening out of the rally that began at the end of 2022, initially driven by mega-cap technology stocks,” said Allen Kim, director of investment strategy at Bel Air Investment Advisors. The recent leap by the financial and industrial stocks that make up a big chunk of the index “simply reflects the robust underpinning of the US economy,” Kim added.  

Indeed, the latest gains appear to be front-running a transformation in the industries that usually drive an economic recovery and still dominate the Dow. A big reason for the optimism is the growing consensus that the US will avoid a recession, a view confirmed by the Federal Reserve at its meeting last week.

“The idea of a ‘soft landing' has really increased as a possibility over the past couple of weeks, which has also sparked the Dow,” Andrew Kaplowitz, industrials analyst at Citi, said in an interview.

Old Economy Bounce

Through the first half of the year, big technology stocks largely drove the stock market higher. But suddenly the companies that form the backbone of economic growth — including manufacturers of heavy machinery, major financial institutions, communication service providers and health-care providers — are starting to look more viable to investors. 

Well over half of the S&P 500's 503 members have announced their second-quarter results as of Wednesday midday. Out of them, 82% beat Wall Street's average estimates, the highest percentage since the fourth quarter of 2021, compared with 75% for the whole season a year ago, according to data compiled by Bloomberg. 

“It just doesn't seem likely that earnings are going to collapse,” Adam Parker, founder of Trivariate Research and a former Morgan Stanley equity strategist, said in an interview. “You are seeing that in the Dow in particular because those companies have proven to be immune to inflation as their margins have been good.”

The leaders of the Dow's streak include old-economy names like 3M Co., Goldman Sachs Group Inc., UnitedHealth Group Inc. and Boeing Co., all of which got a bump from their earnings. On Tuesday, mining and construction equipment maker Caterpillar Inc. posted strong results and noted “continued healthy demand.” 

In addition, the Dow's sluggish performance in the first half of the year, rising just 3.8% through June 30 compared with a 16% gain in the S&P 500 and 39% surge in the Nasdaq 100 Index, has left Dow stocks looking far cheaper than the riskier, growth shares. In fact, the Dow's monthly performance in May lagged the Nasdaq 100 by the most since October 2001.

Friendly Trends

“You basically got in a position where the difference between performance of the Nasdaq 100 and the Dow was historic and that had to flip,” Matthew Tuttle, chief executive officer of Tuttle Capital Management, said in an interview. 

With concerns about an economic hard landing receding, investors are starting to pay attention to the broader trends that can provide big boosts to those in the manufacturing industry. 

The artificial intelligence boom has chipmakers like Intel Corp. seeing a surge in demand. The once-in-a-generation energy transition away from fossil fuels is introducing a wave of new opportunities for companies focused on cleaner transportation, heating and cooling. In the US, the need to upgrade the nation's crumbling infrastructure — roads, bridges, airports, railways, electric grids and communication systems — will get support from a variety of Biden administration programs that provide funding and tax incentives for companies in those sectors.

“We have not had as many mega-trends as we have now driving industrials growth,” Citi's Kaplowitz said.  

Still, some on Wall Street remain convinced that the Dow's short-term winning streak, even one of historic proportions, may not hold much significance. To them, the the 30-stock index may be a popular name in investors' imagination, but it has little practical meaning as a measurement. 

“The market is random,” said Trivariate's Parker. But more importantly, “in my 25 years of meetings with institutional investors, no one has ever asked me about the Dow.”

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