Is the Dow Jones Industrial Average Going to Plunge? History Offers a Potentially Worrisome Tale.

Whether you realize it or not, this is a big week for the ageless Dow Jones Industrial Average (DJINDICES: ^DJI). Following the close of trading today, Nov. 7, a new era will begin for the Dow, with two market-leading businesses joining the index, and two longtime stalwarts being shown the door.

On Friday, Nov. 1, the committee that oversees additions and subtractions to this 30-component index announced that struggling semiconductor stock Intel, which has been in the Dow Jones for the last 25 years, and specialty chemicals company Dow Inc., which was part of the DowDupont spinoff in 2019, will be given the boot.

Unlike the broad-based S&P 500 (SNPINDEX: ^GSPC) and growth-fueled Nasdaq Composite (NASDAQINDEX: ^IXIC), the Dow Jones Industrial Average is share price-weighted. Intel and Dow Inc. were two of the three components with the lowest share prices, and thus the least influence within the index.

Image source: Getty Images.

The 53rd change in the components of the Dow, dating back to its inception on May 26, 1896, will see painting and coating products company Sherwin-Williams replace Dow Inc., and artificial intelligence (AI) juggernaut Nvidia (NASDAQ: NVDA) boot Intel to the curb. Nvidia's historic 10-for-1 stock split in June, which brought its share price down from what would be north of $1,300, is what makes its entrance into the Dow possible.

While most investors will likely view the addition of Nvidia as a long overdue move for one of America's most-influential businesses, history suggests it may have set Wall Street's most iconic index up for disaster.

History presents a genuine problem for the Dow Jones Industrial Average

On paper, Nvidia's ascent has been nothing short of textbook. Demand for the company's AI graphics processing units (GPUs) has been exceptionally strong. With orders for its H100 GPU (commonly known as the "Hopper") and successor Blackwell GPU architecture backlogged, Nvidia has been able to command otherworldly pricing power for its hardware and push its gross margin into the mid-70-percentile.

Not to be overlooked, the CUDA software platform has played an important role in keeping clients loyal to Nvidia's ecosystem of solutions. CUDA is the toolkit developers use to maximize the potential of their AI-GPUs, including building large language models.

Though this would all seem to be great news for the Dow's newest addition, history stands in the way of Wall Street's most-revered index.

For the last 30 years, every next-big-thing innovation, including the advent of the internet, has endured a bubble-bursting event relatively early in its expansion cycle. This is to say that investors have, without fail, overestimated how quickly a new innovation or technology would be adopted, as well as utilized.

While strong demand for AI hardware and data-center infrastructure would seem to suggest artificial intelligence may be the exception to the rule, the reality is that most businesses lack a bona fide game plan to generate a positive short-term return on their AI investments. There's a big difference between businesses buying hardware from Nvidia and really understanding how to harness AI to grow their sales and profits. For the most part, the latter part hasn't been achieved yet.

If history were to repeat itself and the AI bubble bursts, no company would be hit harder than Nvidia. But it's not the only Dow component that would feel the pinch. Microsoft's cloud infrastructure service platform Azure, and Amazon's cloud infrastructure service, kwon as Amazon Web Services, are heavily incorporating AI solutions. IBM, Apple, and Salesforce are reliant on AI for future growth, too.

A bubble-bursting event, which history says is coming, would undeniably be bad news for the Dow Jones Industrial Average and may cause the iconic index to plunge.

Image source: Getty Images.

But wait -- there's a silver lining, too

Then again, there is a bit of a silver lining amid history's seemingly gloomy forecast for this ageless index.

As I pointed out earlier, the Dow is unique from Wall Street's two other major indexes in that it's based on share price and not the market cap of its underlying components. Whereas the Nasdaq Composite and S&P 500 are overwhelmingly tied to the performance of the current and former trillion-dollar businesses that make up the "Magnificent Seven," this simply isn't the case with the Dow Jones Industrial Average.

Even with Nvidia challenging Apple to become the largest publicly traded company, it'll be just the 22nd most-influential company when added to the Dow. In fact, it'll have the least influence of all the tech stocks currently in the index.

Meanwhile, many of the most important Dow constituents -- i.e., those with the highest share prices -- have virtually nothing to do with the AI revolution. UnitedHealth Group, which has the greatest influence in the Dow, wouldn't see a drop-off in insurance coverage demand just because businesses haven't figured out how to properly monetize their AI investments. The same can be said for Goldman Sachs, Home Depot, Caterpillar, Amgen, McDonald's, Visa, and American Express, which are all top-10 influencers in the Dow, based on their respective share price.

In other words, the Dow Jones might actually outperform the S&P 500 and Nasdaq Composite, even though all three would be hurt by a bursting of the AI bubble.

The other thing to consider is that a bubble-bursting event doesn't mean the end of the line for a new technology or the companies leading that trend. Even though the dot-com bubble walloped tech stocks and internet-based companies for a couple of years, there's no denying that the internet has been transformative for the growth potential of corporate America. Once a technology matures and businesses have a concrete game plan on how utilize it, the sky can be the limit.

Although history says the AI bubble will eventually burst, there's also plenty of promise that artificial intelligence will meaningfully improve the growth prospects for businesses over the long run.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $857,383!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of November 4, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. American Express is an advertising partner of Motley Fool Money. Sean Williams has positions in Amazon, Intel, and Visa. The Motley Fool has positions in and recommends Amazon, Apple, Goldman Sachs Group, Home Depot, Microsoft, Nvidia, Salesforce, and Visa. The Motley Fool recommends Amgen, Intel, International Business Machines, Sherwin-Williams, and UnitedHealth Group and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.