The Dow's climb to a record 40,000 points

The Dow Jones Industrial Average DJI, a laggard among the major U.S. stock indexes this year, got its moment in the spotlight on Thursday as it briefly broke above 40,000 points for the first time in its history.

The record on the Dow - as well as fresh records on the S&P 500 SPX and Nasdaq Composite IXIC earlier this week - come as investors grow more confident that the U.S. is heading for an economic soft landing, where the Federal Reserve is able to tame inflation without badly hurting growth.

A stronger-than-expected earnings season has also helped propel stocks higher, with 77% of companies beating estimates, compared to 67% historically, according to LSEG IBES data as of May 10.

While Dow components are weighted in the index by their share prices, S&P 500 stocks are weighted largely by their market value. The relatively infrequent changes to the Dow means it sometimes may be slower to include some of the hottest companies.

Some $89 billion in assets is benchmarked to the Dow, compared to $11.45 trillion pegged to the S&P 500, according to the S&P Dow Jones Indices annual survey of assets as of December 2023.

Still, the price-weighted index retains cultural cache: established in 1896, it is far older than the S&P 500, which was launched in 1957 and the Nasdaq, which was launched in 1971. The Dow outperformed the S&P 500 in eight of the last 20 years. This year, it is up 5.8%, compared to the S&P 500's 11.1% year-to-date gain and the Nasdaq's 11.2% rise.

"The Dow is America's index," said Quincy Krosby, chief global strategist at LPL Financial. "It has been slighted by the professionals, but the Dow is enduring and it represents Main Street America,"

The index closed at 39,869.38 on Thursday after reversing in afternoon trading.

Past 10,000-level milestones in the Dow have been followed by accelerated gains in the index, though market participants say it is difficult to pinpoint a reason for the momentum.

The Dow has notched an average gain of 4.3% in the month after crossing a 10,000 point milestone. That's well above the index's average rolling one-month gain of 0.57% since May 1896.

"Breaking the 40,000 barrier is a big psychological boost for the bulls as round numbers hold special significance in people's hearts and minds," Chris Zaccarelli, chief investment officer at Independent Advisor Alliance said in a note.

The most recent milestone comes a little more than three years after the index hit 30,000 points, a period marked by big market swings as investors grappled with the aftermath of the COVID-19 pandemic, surging inflation and the interest rate increases by the Fed to combat rising consumer prices.

The composition of the Dow can contrast markedly from that of the S&P 500 due to the different methods by which the indexes select and weight their constituents.

For example, the top weight in the Dow as of Wednesday's close, UnitedHealth Group UNH, is only the 13th most heavily weighted stock in the S&P 500. The Dow's second-biggest weighting, Goldman Sachs GS, does not make the S&P 500's top 50.

By contrast, three of the top six weights in the S&P 500 - Nvidia NVDA, Alphabet GOOG and Meta Platforms META - are not in the Dow.

The Dow's journey from 30,000 to 40,000 points has been marked by a wide gap between the index's best and worst performing stocks. Top performers include American Express AXP, Caterpillar CAT and Microsoft MSFT, whose shares have all roughly doubled in value since November 2020, when the Dow first touched 30,000.

Bringing up the rear are Verizon VZ, Nike NKE and Intel INTC, which have shed around a third of their value over that period.