S&P Dow Jones announced on Friday that Nvidia and The Sherwin-Williams will replace Intel and Dow Inc respectively in the Dow Jones index, effective November 8. The advent of the king of GPUs for AI is hardly a surprise. That of the specialist in technical paints a little more so, but we won't go into details here, as we've left it to my colleague Arthur Kuntz to paint the painter's portrait.

What are the criteria for inclusion in the Dow Jones?

Inclusion in the Dow Jones Industrial Average (DJIA) is a milestone for companies listed in the United States. Wall Street's oldest index comprises just 30 stocks, and changes are relatively rare (7 in the last 15 years). Inclusions and exclusions are subject to several criteria, not all of which are explicitly defined, as selection is partly subjective (no real numerical criteria, apart from share price) and carried out by a special committee of S&P Dow Jones Indices. Here are a few criteria:

  • The company has an "excellent reputation".
  • Sustained growth
  • Attractive to a large number of investors
  • Maintains "adequate" sector representation
  • It must be incorporated and headquartered in the United States, and generate "a significant portion" of its revenues there.
  • It does not belong to the Transportation (GICS code 2030) or Utilities (GICS code 55) sectors.
  • The most expensive stock in the index must not be more than ten times more expensive than the cheapest.

The right price

The Dow Jones is a price-weighted index - an incongruity in modern times - and not a capitalization-weighted index. Based on the current share price of USD 135, Nvidia and its 3,321 billion dollar capitalization would rank 9 th in the index, while The Sherwin Williams, with its USD 358 share price and 90 billion dollar capitalization, would be 6 th. That's the magic of price indices! Currently, the Dow's most influential stock is UnitedHealth (USD 567), ahead of The Goldman Sachs Group (USD 519) and Microsoft (USD 410).

The market had speculated thatAmazon would enter the Dow in 2022, after a "split". The stock was finally added in early 2024, at the expense of Walgreens Boots (which had ousted General Electric in 2018). In the technology segment, Microsoft and Intel had joined the index in 1999, becoming the first Nasdaq-listed stocks to be included in the Dow, while Apple had to wait until 2015 (in place ofAT&T).

Nvidia had become a legitimate candidate

Nvidia's meteoric rise, from maker of graphics cards for gamers to star of processors for crypto and then AI, made the stock a natural candidate for the Dow. So much so, in fact, that financiers were no longer wondering if the company was going to get in, but when. At the same time, Intel's steep decline put the stock at risk within the index. Substitution was therefore likely.

The arrival of the technology sector's growth engine of the past few years may come late, but it could enable the venerable index to distance itself less from the S&P500 and the Nasdaq during periods when California's stars are doing very well.