The Dow remained almost unchanged even though many of the companies within it had seen their values rise. This is because the explanation shows how America’s most well-known stock index can hide what is going on beneath the market.
The Dow Jones Industrial Average ended the week on October 13, 2026, very nearly at the level from which it had started, although its essentially unchanged figure masked a surprising change: eighteen of the 30 stocks that make up the index had increased since the close on Friday. Although only 12 had refused to do so, the index still increased by 15.15 points, which is 0.03 per cent, and finished at 51,670.10. The issue wasn’t that there were not enough stocks that had risen; it was the exceptional influence of two companies whose combined losses had almost nullified the gains obtained from the rest of the index.
Caterpillar and Johnson & Johnson together caused about 241 points of downward pressure on the Dow in the first two trading sessions. Caterpillar’s shares dropped by $27.69 and those of Johnson & Johnson fell by $12.83. On the other hand, Salesforce rose by 3.88%, Visa gained 2.75%, Chevron increased by 2.71% and Coca-Cola went up by 2.34%. When the 30 stocks were averaged on an equally weighted basis, the result was an average gain of approximately 0.27%, which is nearly nine times the actual percentage increase of the Dow. This discrepancy leads to a significant question: to what extent does America’s most well-known stock market index accurately reflect the performance of the companies it includes?
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Last month TerreneGlobe looked at a rather unusual case involving the S&P 500. In September nearly 80 per cent of the individual stocks making up the index declined, even though a small number of large companies succeeded in stopping the index from dropping considerably. The performance of the Dow this week shows the other side of the same coin. While most of its companies rose in value, losses in just two of them caused the overall index to remain almost unchanged. Although these are different times and different indexes, together they show how the way an index is constructed can lead to very different impressions of the state of the market.
The reason for this is mathematical. As stated in S&P Dow Jones Indices’ official methodology, the Dow Jones Average is price-weighted not market-capitalization-weighted. It therefore follows that a $1 change in the price of a company’s shares has about the same impact on the Dow no matter what the company’s total market value is. This week, each $1 move in the price of one of the companies’ shares amounted to about 5.94 points on the index; Caterpillar’s drop of $27.69 thus accounted for a decrease of approximately 164.5 points, and Johnson & Johnson caused another loss of 76.2 points. Although this is mathematically accurate, it does mean that the index’s movement does not necessarily reflect the experience of the majority of the companies it includes.
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The fact that those losses occurred is especially enlightening. Caterpillar has gained from the expectation of higher spending on energy infrastructure, power generation and artificial intelligence data centres. At the same time, investors are starting to wonder if its high valuation can continue. On October 13, Investing.com reported that Citi analyst Kyle Menges lowered his price target for Caterpillar from $1,100 to $950 while keeping his Buy recommendation. This change shows that there is an increasing worry that even companies which are benefiting from the infrastructure boom might end up being vulnerable if expectations rise faster than their actual earnings.
The problems faced by Johnson & Johnson arose from a different source. As shown in its third-quarter financial results, the company achieved revenue of $25.4 billion, representing an increase of 5.9 per cent, and raised its annual guidance. However, sales from its medical technology business amounted to $8.64 billion, falling short of what analysts had expected. Joe Wolk, the company’s chief financial officer, admitted to the weaknesses in that division and stated to investors, as reported by The Wall Street Journal, “We are clear on where MedTech performance needs to improve.” The company’s performance shows how investors can penalise a business segment that is underperforming even if the corporation as a whole is experiencing rising revenues.
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The fact that the more strongly performing companies in the Dow indicate that investors have not given up on risk suggests that they are ready to give rewards to certain opportunities even as they become more demanding in other areas. Salesforce took the lead in the index after Bank of America analyst Tal Liani changed his rating of the company from Underperform to Buy and increased his price target from $160 to $285. This change was based on a reevaluation of whether artificial intelligence threatens existing enterprise software platforms or instead makes customers more dependent on them. Liani stated as reported by Yahoo Finance (https://finance.yahoo.com/markets/stocks/articles/salesforce-scores-double-upgrade-bofa-205033368.html), “If anything, AI should deepen dependence on these platforms.”
Visa has given yet another instance of selective optimism; the company announced on October 13 that the People’s Bank of China had approved its application to start making preparations for a domestic bankcard clearing operation. While this approval does constitute a significant opportunity in the Chinese payments market, it must be noted that permission to prepare does not mean that operations can begin. As for Chevron’s gains, these were due to continued investor interest in energy companies at a time when there was geopolitical uncertainty and oil prices were high.
A significant counter-argument to the view that the Dow’s divergence shows economic conditions are worsening is that two sessions are not enough to prove the establishment of a permanent market trend. Johnson & Johnson has raised its revenue forecast, Caterpillar still has exposure to strong infrastructure demand, and some of the other companies in the Dow have continued to do well. It is therefore possible that the index’s poor performance tells us more about its method of weighting and about the specific developments affecting companies than it does about the general state of corporate America.
Yet for investors analysing market signals the distinction is important; although the Dow had a weekly return close to zero it had hidden within it gains for 18 companies, strong progress in the software and payments sectors, and concentrated weakness in industrial equipment and in healthcare. Since further earnings reports and the September inflation figures are due, investors should keep an eye on whether the relationship between the index and its individual components continues to hold.
Perhaps the more important question isn’t now whether the Dow goes up or down, but whether the companies that contribute to the figure at the top are telling the same economic story as the majority of businesses below it.