An interesting event is happening with respect to U.S. stock markets lately: the Dow Jones Industrial Average (DJIA) is having days where it is significantly outperforming the S&P 500. Over the past 10 years, the DJIA has outperformed the S&P 500 and may serve as a better barometer of overall U.S. market performance. Over the past 10 years, the DJIA is up roughly 29% and the S&P 500 is up 25%.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Not a Fair Comparison
Realistically, one shouldn't expect a similar result from the Dow Jones Industrial Average, which consists of 30 stocks, and the larger S&P 500. To be sure, the DJIA has been modified over the years so that the index is actually a decent proxy for the U.S. market. In addition to typical industrial names like Caterpillar (NYSE:CAT), the Dow also includes leading technology names like Microsoft (Nasdaq:MSFT). However, the S&P 500 includes all of those plus important names such as Visa (NYSE:V), which is not included in the DJIA but is nonetheless a very strong part of the U.S. and global economy.

Valuation Matters
Ultimately, valuation matters and drives stock prices higher or lower. Coming out of the recession the market surge led a magnificent run up in lesser quality smaller cap issues. By definition, the DJIA is made up of 30 of the largest and strongest companies that collectively produce a decent barometer of overall industry performance. Today's big cap companies seem to offer the most attractive upside from a valuation standpoint. Dow component Chevron (NYSE:CVX) trades for less than eight times earnings and yields 3.2%. The price of oil is in a really good place for oil companies today, and that will likely mean significant profits for Chevron. Verizon Communications (NYSE:VZ) is benefiting from pricier data plans as consumers consumer more data on devices like smartphones and tablet computers. With shares yielding 5.2%, conservative income-seeking investors will be attracted.

SEE: Why Dividends Matter

The Bottom Line
Ultimately, comparing the performance between the Dow Jones Industrials and the S&P 500 is not a meaningful exercise. For one, the DJIA is a price-weighted index, so strong performance from high price stocks will have an abnormal effect on returns. What matters is the valuation of companies, and at the moment, many of the DJIA components, who also belong to the S&P 500, offer the best risk/reward profile.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    Tech Stocks Vs. Financial Stocks in 2016

    Consider the arguments for allocating more of your investment portfolio to either the technology sector or the financial sector for 2016.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center