Source: Jin10 Data

The recent decline of the Dow can be attributed to the fact that it is a price-weighted index and is more susceptible to lagging cyclical stocks than to popular technology stocks.

The S&P 500 and Nasdaq have been setting new records recently, doing so again on Monday, but not the Dow.

The Dow broke the 40,000-point peak on May 17th, but since then, the index, which consists of only 30 industrial stocks, has fallen by about 3%.

So why has the Dow performed poorly while other major market indices continue to rise? For those who are not invested in funds tied to the Dow, this disconnect is almost laughable.

This can be attributed to the unique price-weighting method used by the Dow, while the S&P 500 and Nasdaq are market-cap weighted. In addition, the Dow is heavily dependent on interest-rate-sensitive financial stocks, which have also declined with falling long-term bond yields.

However, financials are not the only weak performers among the Dow's constituent stocks. Other companies that are more closely oriented to value and cyclical industries have also been hit. Chevron is the worst performing Dow stock in June. Disney, Caterpillar, and Verizon are also pulling the index down.

On the other hand, the big winners in the Dow are mainly the technology stocks. Apple, Microsoft, and Amazon stocks are among the top five performers. But these stocks are also large-cap stocks that drive the rise of the S&P 500 and Nasdaq indices. Their impact on the daily fluctuations of the Dow is small because the Dow is affected by individual constituent stock prices.

Of course, Microsoft's stock price weight ranks third, but Apple and Amazon rank only 11th and 15th, respectively, among the Dow's constituent stocks.

This means that their big gains this month are not enough to offset the fact that nearly two-thirds of the Dow's constituents fell in June, including the heavily weighted Dow stocks Goldman Sachs, Caterpillar, Amgen and McDonald's.

"There has been a narrow surge," said Phil Orlando, chief equity strategist at Federated Hermes, in an interview. He added that the market "may have reached the point where rebounds should be broadened," but acknowledged that many large-cap value stocks "have been abandoned."

This trend may continue. Large-cap growth stocks still appear to be the market sector that many investors prefer.

Sinead Colton Grant, Chief Investment Officer of BNY Wealth, said she is bullish on large-cap growth sectors such as technology and communications services because they are constantly innovating, have low debt levels, and generate significant cash flow. This should keep them safe from concerns that the Fed may maintain interest rates before December. Sinead Colton Grant added that reasonable valuations and strong earnings growth will also bring further returns.

She said that although the S&P 500 has already exceeded her company's year-end target of 5,400 points, if there is no economic recession and large technology companies continue to maintain strong sales and earnings growth, the S&P 500's year-end target could be higher than 5,400 points.

"It's all about the momentum of technology stocks," said Colin Graham, head of multi-asset strategy at Robeco, in an interview.

He pointed out that even outside of the top three technology stocks in the Dow, announcements of artificial intelligence and strong performance expectations from companies such as Nvidia (NVDA.O), Oracle (ORCL.N) and Adobe (ADBE.O) have amazed Wall Street. "Technology firms are realizing profits. As long as they continue to do so, this year should be a good year," he added.

This is good news for investors. However, don't expect the Dow to reflect this quickly, as its composition still relies relatively less on large tech stocks compared to the S&P 500 index and the Nasdaq.

Editor/Lambor