A quite unusual thing has been happening on the US share market, with the technology sector which has done most of the heavy lifting for this year’s rally passing the baton on to industrial companies.
In what could be a bullish sign that the US market rally has further to run, the lower-tech Dow Jones index has been rising faster than the much larger and more tradeable S&P 500 index, which has been driven higher by the large technology companies.
It may be early to read too much into this trend but at least some major investors are seeing higher share prices for big manufacturers as indicative of a broadening out of the share market rally.
The venerable Dow Jones index is still topped by Apple and Microsoft but also includes a range of older, “big name” industrials such as Johnson & Johnson, Procter & Gamble, Home Depot, McDonald’s Corporation, Caterpillar, Boeing, 3M and Dow to name a few.
Dow Jones now beating the S&P 500
While the Dow Jones index relates to just 30 companies, unlike the S&P 500 it is not a market-cap weighted index but is a price weighted index.
That means that the multi-trillion-dollar technology behemoths like Apple and Microsoft that can easily push the S&P 500 up or down because of the size of their market capitalisation don’t have such a big effect on the Dow Jones.
Of course, the recent superior performance of the Dow could simply be a random quirk rather than a sign of a broadening of the share market rally away from technology but it is a fact that the health, financial and industrial companies that are represented in the Dow Jones have been enjoying more investor interest of late.
Soft landing could drive returns
That is partly because of greater optimism that the US will avoid a recession even as interest rates continue to rise and that the hoped for soft landing will drive activity and growth across industrial and financial companies.
While the profit reporting season is still continuing in the US, the second quarter results from the first half of reporting companies have predominantly reported stronger than expected results, which shows that company revenues and profits have not been collapsing as much as some feared.
The more old-fashioned companies that were left behind in the tech rally are also looking relatively cheap and less risky to investors, which is helping to drive their share prices higher.
Other positive trends include the Biden Government’s push to ramp up spending on infrastructure and broader trends to increase investment in clean technology and the positive effect on chipmakers and other companies of the artificial intelligence boom.
Whatever the reason, more brokers have been predicting a further rally in the US market, which will be a crucial influence on the Australian market.
US Fed closer to ending rate rises
Feeding into that positivity is the chance that the US Federal Reserve is drawing closer to ending its frenetic cycle of interest rate rises, which could also help to increase the relative attractiveness of shares compared to bonds if rates begin to ease.
Among the more bullish analysts is John Stoltzfus, chief investment officer at Oppenheimer & Co, who has lifted his year-end target for the benchmark S&P 500 index by 11% to 4900 points.
His key assumptions are that inflation will continue to fall, that borrowing costs will return to a more traditional pricing after the end of the “free money” era and that money that has been sitting on the sidelines will start to flow back into the share market.
Of course, we all know that predictions are always problematic and that markets have a habit of confounding them with all manner of surprises but here in Australia investors should be happy that our relatively lower-tech market could be a beneficiary of the move of investor funds from the massive technology titans to the sorts of industrial, mining and financial companies that dominate the local ASX 200.
