The Dow Is on Fire This Year. What Ignited the Gains. — Barrons.com
2 min read
Al Root
There is a great rotation going on in the stock market, from potentially AI-disrupted names to companies that make real things, and you can see it in the Dow Jones Industrial Average.
So far in 2026, the Dow is leading the way, briefly cracking the 50,000 level. Through midday trading on Friday, the blue-chip index was up about 3% year to date, ahead of the Nasdaq Composite by almost 6 percentage points.
That difference shows investor fears and trading trends. The two best stocks in the Dow this year have been Caterpillar and Honeywell, makers of heavy machinery and aerospace parts, among other things. The two worst stocks are Salesforce and IBM, which are suffering as investors fret that Anthropic's AI tools will render software and services worth much less than they were in a pre-AI world.
But the Dow's old-economy tilt isn't driving the index's gains — it still has plenty of technology, including Amazon.com, Apple, Microsoft, and Nvidia.
The secret of the Dow's success lies in its index construction. It is a price-weighted index, not a market-cap-weighted index like the S&P 500 and Nasdaq. Higher-priced shares count for more in the Dow. More valuable companies count for more in the other two.
The market value of the Dow companies is down more than $760 billion so far in 2026. If the index were cap-weighted, it would be down almost 4% year to date.
The reality is that tech is much bigger than the 'real' sectors of the economy. When market participants take money out of Microsoft and put it into Caterpillar, Cat stock can't help but soar. Microsoft has lost more than $600 billion in market value. Cat has gained $75 billion.
There is too much money chasing real stocks these days. That is great for holders of Cat, Honeywell, and other manufacturers — along with consumer staples stocks — all of which have soared in 2026.
The extra money flowing into real things has other impacts. Over the past year, Caterpillar's price-to-earnings ratio has soared from about 16 times earnings estimated over the next 12 months, a discount to the market, to 31 times, a big premium to the S&P 500's 22 times multiple.
It is important for investors to be clear-eyed about what is going on. Cat is a high-quality industrial stock. Investors have been encouraged by growth in its power generation business and by the potential for a recovery in some construction markets. There are fundamental reasons for gains. Still, some of the increases come down to too much tech money chasing too few real stocks.
The dynamic will continue until it stops. So, industrial investors should pay attention to things such as the State Street SPDR S&P Software & Services ETF to see if the rotation is running out of steam or reversing.
Coming into Friday trading, that ETF was down about 18% year to date. Machinery and software stocks aren't always inversely correlated with one another, but they are for now.
Write to Al Root at allen.root@dowjones.com
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