Next week, Amazon will be included in the Dow Jones Industrial Average.
On Tuesday (20th) local time, the S&P Dow Jones Industrial Average announced that Amazon will replace retail pharmacy chain Walgreens Boots Alliance and be included in the US blue chip index Dow Jones Industrial Average. This change will take effect before the market opens on February 26th.
Amazon's stock price rose 1.3% in post market trading, while Walgreen's stock price fell 3%.
Reflecting changes in the US economy
The S&P Dow Jones Index stated in a statement that this adjustment will increase the risk exposure of consumer retail and other business areas of the Dow Jones Industrial Average, reflecting the constantly changing nature of the US economy.
As a result, Amazon became the third "Big Seven" company to be included in the Dow after Apple and Microsoft.
The statement said that the change in the index originated from the decision of Wal Mart, the Dow component company, to split its shares at a ratio of 3:1. Unlike the S&P 500 and Nasdaq Composite Index, the Dow Jones Industrial Average is weighted by stock price rather than market value. The split of Wal Mart will reduce its weight and the weight of the consumer goods industry in the index. Wal Mart will remain in the Dow Jones Index.
The last adjustment of the Dow Jones Industrial Average dates back to August 2020, driven by the stock split of Apple Inc. At that time, Salesforce, Amgen, and Honeywell International replaced ExxonMobil, Pfizer, and Raytheon Technologies to join the index.
Due to relatively low attention to technology stocks, the Dow Jones Industrial Average has significantly lagged behind the S&P 500 and Nasdaq in recent years. Over the past five years, the Dow Jones Industrial Average has risen by approximately 50%. During the same period, the S&P 500 index and Nasdaq rose by over 75% and 100% respectively.
According to statistics, as of January 31st, the financial sector ranked first in the Dow Jones Industrial Average, accounting for 21.5%. Information technology and healthcare rank second and third, accounting for 19.7% and 19.1% respectively. The proportion of industrial and non essential consumer goods is 14% and 12.9%, respectively.
Compared to this, the information technology sector ranked first in the S&P 500 index with a proportion of 29.5%, followed closely by finance and healthcare, accounting for 13.1% and 12.8% respectively.
According to media reports, based on the weight and influence of the index, Amazon ranks 17th in the Dow. At present, United Health Group will continue to maintain the top spot, accounting for approximately 9% of the Dow Jones Industrial Average. Microsoft and Goldman Sachs followed closely behind, accounting for approximately 7%.
Is the next one Alphabet?
Considering the significant decline in Walgreen's stock price in recent years, its exit is not surprising.
Walgreens replaced General Electric (GE) as a constituent stock of the Dow in 2018. Since then, its stock price has been in trouble, with its market value evaporating by more than two-thirds, making it the worst performing Dow component company in 2019 and 2023.
According to media statistics, the company's influence in the Dow's constituent stocks is minimal, at only 0.4%, with a market value of less than $20 billion.
With the shrinking demand for COVID-19 testing and vaccines, Walgreens is making every effort to make up for the loss of income and cut dividends significantly. After excluding non controlling interests, Walgreen's loss in the previous quarter decreased from $3.8 billion in the same period last year to $278 million.
On the other hand, strong post pandemic online consumption has driven Amazon's stock price to quickly rebound from its low point, and the rise of artificial intelligence has also boosted the sales performance of its cloud computing division.
Since the beginning of 2023, Amazon's stock price has almost doubled. The latest financial report shows that Amazon's fourth quarter profit increased from $278 million to $10.6 billion.
Last year, Amazon's stock price rose by 81% in 2023, and has risen by 11% since the beginning of the year. As of the 21st, the company's market value reached $1.736 trillion.
Analysis suggests that Google's parent company Alphabet, which completed its stock split at a similar time as Amazon, may become the next company to join the Dow Jones component.
The latest research from Deutsche Bank shows that with the rapid growth in profits and market value of the seven major technology giants in the United States (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla), the combined market value of the seven giants alone can make them the world's second largest securities exchange, twice the number of Japanese stock markets ranked fourth.
Daniel Casali, Chief Investment Strategist at Evelyn Partners, stated that there is a risk of missing investment opportunities when the market is so focused on a few stocks and a specific theme (especially artificial intelligence).
Casali believes that the resilience of the US economy and increased corporate profit margins will help drive the trend of 493 stocks in the S&P 500 index.
"Given the outstanding performance of AI led stocks in 2023 and early this year, investors may be inclined to continue supporting them," Casali added. "However, if the uptrend starts to expand, investors may miss out on opportunities beyond the seven major stocks."