The Dow Jones Industrial Average faces serious headwinds as it navigates an economy without “mouths or noses” with little tech exposure.
The Dow Jones Industrial Average’s crown jewel reported earnings last night, and boy, was it a blowout. Apple stock is surging in pre-market trading – with good reason. Revenue smashed records and crushed estimates. Analysts are hiking their AAPL price targets left and right.
Wedbush Securities raised its target to $475, gushing that Apple is on the verge of achieving a $2 trillion valuation:
We believe during 2021 Apple will be the first $2 trillion valuation given the 5G tailwinds and services momentum potential over the coming years.
Apple shares are the main reason Dow futures are trading up on Friday. As of 9:09 am ET, futures tracking the blue-chip index stood at 26,271 for a gain of 53 points or 0.2%.
S&P 500 futures rose 0.23%, while Nasdaq futures skyrocketed 1.02%.
It’s not unusual for AAPL to single-handedly prop up the Dow Jones.
The stock has virtually carried the index on its back throughout the recovery, accumulating a heftier and heftier weighting in the process.
AAPL entered the year as the Dow’s third-heaviest component with a weighting of a bit less than 7%. As of Thursday’s close, the stock boasts a 10.03% weighting and the largest slice of the index.
It holds more sway over the 30-member benchmark than the bottom eight stocks combined.
But not for much longer.
Apple made a surprise announcement during its July 30 earnings report: It will execute a four-for-one stock split on August 31.
This doesn’t mean much if you’re an Apple shareholder. You’ll still own the same amount of Apple stock. That value will just be spread across four times as many shares worth one-fourth what they were the day before.
It does mean quite a bit if you invest in a Dow Jones Industrial Average index fund (fairly unusual) or Google “Dow Jones today” when you want to check up on the stock market (very common).
Even though broad indices like the S&P 500 and Wilshire 5000 better reflect conditions in the overall market, the Dow is an important bellwether for sentiment. When the average person talks about the stock market, what they’re really talking about is the Dow.
Unlike the S&P 500, the Dow is a price-weighted index. This means stocks are weighted by their share prices – not their market capitalizations.
When Apple’s stock split takes effect, its Dow Jones weighting will plunge by 75%. Based on current share prices, its weighting should be around 2.5% – comparable to JPMorgan Chase and Nike.
This “facelift” will inevitably affect pricing in the overall index.
As the world accustoms itself to a new normal of social distancing, one strategist advises investors to position their portfolios for an economy without “mouths or noses.”
Dhaval Joshi, the chief European investment strategist at BCA Research, says last quarter’s Big Tech earnings coup exemplifies what this economy will look like.
Businesses impacted by mask-wearing, physical distancing, and other similar restrictions will bleed. As many as 10% of all jobs in these labor-intensive sectors will disappear forever.
And Big Tech will feast on the carnage.
From oil supermajors like Chevron – which lost $8.3 billion in the second quarter as demand for crude evaporated – to Boeing to seemingly-diversified businesses like Disney, the Dow is loaded with companies that have suffered during the pandemic.
Even before the Apple stock split, the Dow’s relatively smaller exposure to the tech sector had caused the index to lag the overall market.
While the Dow languishes around 8% below where it started the year, the S&P 500 has reversed its losses to trade narrowly higher. The Nasdaq? It’s surged an unbelievable 18%.
Absent a reversal in market dynamics, Apple’s stock split is only going to widen the gap.