The Dow Jones has lagged behind other indices, but upcoming factors may boost its performance in 2025
So, why is the Dow struggling? Well, the Federal Reserve has been leaning towards growth stocks, which has helped the Nasdaq shine. The Dow, on the other hand, is more about value stocks, which usually do better when interest rates are high.
The recent surge in the S&P 500 and Nasdaq is largely thanks to the “Magnificent Seven” stocks—NVIDIA, Amazon, Microsoft, Apple, Meta, Alphabet, and Tesla. If you’re not heavily invested in these stocks, it’s tough to keep up with the market.
But don’t count the Dow out just yet. There are some signs that it could rally soon. For one, the upcoming Trump 2.0 era might shake things up. If his policies lead to higher domestic inflation, the Fed might have to change its current approach, which could benefit value stocks like those in the Dow.
Fed Governor Michelle Bowman recently mentioned that while she supports the recent rate cuts, there are still risks of inflation. This could mean a high-rate environment, which is usually good for value stocks. Since the Dow has a stronger value focus than the S&P 500 and Nasdaq, it might perform better in early 2025.
Right now, the Dow has a price-to-earnings ratio of 26.80, which is more moderate compared to the S&P 500 and Nasdaq. This could give it a better chance to rise if conditions are right. Investors might want to keep an eye on ETFs like iShares Dow Jones U.S. ETF (IYY) and DIA.
However, there are still some worries. The future of UNH, the largest component in the Dow, is uncertain with Trump back in the picture. Health insurance stocks have been under pressure, especially with Trump’s talk about cutting out the middleman.
The Dow is also heavily invested in financial stocks. If geopolitical tensions rise due to Trump’s policies, we might see lower long-term U.S. treasury bond yields, which usually isn’t good for financials.
Interestingly, the Dow only includes four of the Magnificent Seven tech stocks: Amazon, Microsoft, Apple, and NVIDIA. The other two rising stars, Tesla and Alphabet, aren’t part of the Dow, which could be a disadvantage.
In summary, while the Dow Jones might not be the star performer, it could still see moderate to positive growth in 2025. Keeping an eye on the DIA ETF could be a smart move, especially since the current high interest rates seem to favor the Dow more than the S&P 500 and Nasdaq. The DIA fund is well-diversified, with its top sectors being financials, tech, consumer discretionary, healthcare, and industrials.
