For over a century, Dow Jones Industrial Average (DJINDICES: ^DJI) served as a barometer measuring the health of the US stock market.

When Dow Jones was officially established on May 26, 1896, it was composed of a dozen companies, most of which were related to the industrial sector. Today, it features a lineup of 30 historically profitable, time-tested, industry-leading businesses.

Over the past 128 years, this iconic index has undergone 52 significant changes, excluding components that change names or merge with existing Dow constituents. The the most recent change BEEN Amazon entering the chain of indexes and pharmacies Walgreens Boots Alliance getting the buzz in February — that is, until today.

Prior to the start of trading on Friday, November 8, a new era will begin for the Dow Jones Industrial Average.

Image source: Getty Images.

Wall Street’s ageless index gains further exposure to the AI ​​revolution

The 53rd change in the Dow Jones components will see artificial intelligence (AI) leader Nvidia (NASDAQ: NVDA) enter the Dow company and the semiconductor legacy Intel (NASDAQ: INTC) head for the exit.

Besides being late to the AI ​​party, Intel has the lowest share price in the Dow. Unlike the market cap-weighted S&P 500 and the Nasdaq Composite, where larger companies exert more influence on those respective indexes, the Dow is a stock price-weighted index. Market capitalization is irrelevant in the context of affecting the value of Dow points.

Significant losses related to Intel’s foundry division, which it is building from the ground up, as well as losses in the central processing unit market share for Advanced microdevicesmade Intel a virtual non-factor for this 128-year-old index.

Meanwhile, Nvidia’s biggest stock split (10 for 1) in June paved the way for it to become one of the 30 components of the Dow. Without that split, Nvidia would have topped nearly $1,400 per share, which wouldn’t have worked with the stock price-weighted Dow formula.

The addition of Nvidia gives the mature, stock-focused Dow a new growth component, as well as positions the index to take advantage of AI growth. According to analysts at PwC, the combination of productivity gains and consumption spin-offs related to the AI ​​revolution can add $15.7 trillion to the global economy by 2030.

Nvidia hardware is at the center of the hype ambient artificial intelligence. Its H100 graphics processing unit (GPU) and next-generation Blackwell GPU are the brains behind the split-second decision-making required to run generative AI solutions and build/train large language models. Over a three-year period, Nvidia’s full-year sales are expected to rise from a reported $27 billion to about $179 billion — with AI accounting for nearly all of the projected growth.

While demand for Nvidia’s solutions remains robust, as does the company’s pricing power for its hardware, the addition of this AI leader may it exposes the broad stock index watched by Wall Street to a potential bubble-bursting event.

For three decades, investors have consistently overestimated how long it would take for a game-changing technology to be adopted and/or gain widespread utility. In each case, it resulted in a new technology or innovation failing to live up to high expectations. There is nothing to suggest that AI will avoid the fate of the following previous trends, which includes the emergence of the Internet. If the AI ​​bubble were to burst, the Dow would be at an additional disadvantage compared to if Intel remained in the index.

Image source: Getty Images.

A new component of the materials sector is gaining immediate relevance

In addition to Nvidia’s flagship addition, S&P Dow Jones Indices — the committee that votes for stocks entering and exiting the Dow — chose to start Materials science solutions company Dow Inc. (NYSE: DOW) and replace it with giant painting and coating Sherwin-Williams (NYSE:SHW).

The writing had been on the wall for some time that Dow Inc. he would be shown the door. Following the 2017 merger between Dow Chemical and DuPontthe newly formed company (DowDuPont) declared its intention to eventually divided into three separate businesses. This split took place in 2019, resulting in DuPont, Cortevaand Dow Inc. they all go their separate ways. Dow Inc. remained in the Dow Jones Industrial Average, which technically gave DuPont (through the split) a continuous presence in the index since 1935. That officially ends today.

Similar to Intel, the low stock price of Dow Inc. made it a relative non-factor for the Dow Jones Industrial Average. Additionally, with the loss of the operating divisions of DuPont and Corteva, it was no longer the diversified company it once was.

With Sherwin-Williams entering the Dow today, it immediately becomes one of the most relevant components. Its share price of $378 ranks sixth among the 30 components of this flagship index. Due to the wide gap in stock prices between Sherwin-Williams and Dow Inc., as well as Nvidia and Intel, S&P Dow Jones Indices will adjust the Divisor used to convert the stock price into Dow points.

Being cyclical is arguably the biggest investment draw for Sherwin-Williams. Even though recessions in the US economy are normal and inevitable, tend to be short-lived. Three-quarters of the 12 US recessions since the end of World War II were resolved in less than 12 months. By comparison, most growth periods span several years. This leads to increased consumer, commercial, industrial demand for the company’s products over time as well as increased pricing power.

To add, Sherwin-Williams has made a great job of leaning on inorganic growth to expand. While most of these acquisitions are bolt-on, management hasn’t been afraid to take on a big name from time to time, like Sherwin-Williams did when it acquired Valspar for $11.3 billion in a all cash transaction in 2017. .

The Dow Jones Industrial Average can go years without changes. Today marks the beginning of a new era for this iconic index.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Sean Williams has positions in Amazon, Intel and Walgreens Boots Alliance. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon and Nvidia. The Motley Fool recommends Intel and Sherwin-Williams and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.