CHARLY TRIBALLEAU / AFP through Getty Images
Takeaways
- The Dow Jones Industrial Average plunged more than 500 point Thursday, underperforming the other U.S. major stock indexes.
- UnitedHealth Group, the Dow Stock with the largest weighting within the Index, fell more than 22% following a reduction in its profit outlook for the full year.
- The Dow selection committee is sensitive to the index's peculiar methodology, and thus tends to leave out stocks with unusually high stock prices.
The Dow Jones Industrial Average fell by more than 500 point, or 1.3%, Thursday. UnitedHealth Group was largely to blame.
UnitedHealth shares fell more than 22 percent after the health insurer lowered its full-year profit forecast, citing higher costs than expected. Over two-thirds, or 30 of the 30 stocks that make up the blue-chip Dow – one of most widely used measures of U.S. Stock Market performance – closed higher on Thursday. The S&P 500 was up 0.13% at the same time and the Nasdaq Composite—usually much more volatile than the Dow due to its preponderance of growth stocks—was marginally lower after yesterday’s sell-off.
The Dow’s dramatic underperformance was a clear indication of its unique methodology. The Dow index is price-weighted. This means that the shares with the highest share prices are the ones who have the biggest influence on the index. The S&P 500 and Nasdaq, on the other hand, are capitalization-weighted indexes that are more influenced by the companies with the highest market values, not the highest share prices.
UnitedHealth Group’s closing price of $585.04 was the highest in the Dow yesterday and therefore its most influential component. Goldman Sachs’ (GS) closing price of $499.05 yesterday is the only Dow stock that has a share value within $100 from UnitedHealth. Goldman Sachs could end the week as the Dow’s biggest stock, thanks to UnitedHealth’s losses on Thursday.
Apple (AAPL), which closed yesterday at $194.27, has a fraction UnitedHealth’s impact within the Dow. The iPhone maker, however, has 15 billion share and a market value of nearly $3 trillion. UnitedHealth’s approximately 900 million shares put its market cap at Wednesday’s close at $535 billion, meaning Apple stock has more than 5 times the weight in the S&P 500.
To be sure, UnitedHealth, the S&P 500's 14th-largest company heading into Thursday—still has a massive amount of influence within the S&P 500.
The committee that chooses the Dow stocks is aware of its peculiarities. Its price-weighted methodology, according to S&P Global, “has meant, over the years, that extremely high-priced stocks have not been included in The Dow.” Investors often speculate about companies that have high share prices splitting their stock to increase their chances of joining Dow. In recent times, Amazon (AMZN), and Nvidia(NVDA), both traded at more than $1,000 a share, were added to the Dow relatively quickly after they split their stock.
The Dow is not the only index that can be affected by dangerous imbalances. Earlier this year, the Magnificent Seven—Apple, Microsoft (MSFT), Nvidia, Amazon, Alphabet (GOOG), Meta (META), and Tesla (TSLA)—accounted for about one-third of the S&P 500, an extreme level of concentration that set off some investors’ alarm bells.
Update, April 17, 2025: This article has been updated to reflect stock and index changes at the market's close.
