Last week was a history-maker for the iconic Dow Jones Industrial Average(DJINDICES: ^DJI). The index that was incepted nearly 130 years ago ended the Feb. 6 trading session above 50,000 for the first time.
Investors have watched the Dow transform from a 12-stock, industrial-focused index in the late 19th century to one that now features 30 diverse, time-tested, multinational companies. Over the trailing decade, the Dow has taken down 32 1,000-point milestones, beginning with 19,000 and ending, most recently, above 50,000.
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While investing on Wall Street often entails looking to the future, reminiscing about the past can sometimes clue investors into what to expect in the years to come.
With the Dow Jones Industrial Average surpassing a psychologically important level, the question that needs to be asked is: When will this ageless index hit 100,000? Although the past can’t guarantee the future, history offers a pretty clear answer — and it may be sooner than you might think.
As is often the case when putting your money to work in the stock market, the answer varies with perspective. Using the Dow’s average annual returns as a guideline, we can estimate when it’ll effectively double from its Feb. 6 closing value.
For example, the Dow troughed during the Great Depression on July 8, 1932, at just 41.22. In the more than 93 years since this bottom, the index has returned an annual average of 7.89%. If this annualized return were to persist, it would take the Dow until roughly March 2035 to hit the 100,000 milestone.
But if we narrow the lens to an arbitrary trailing 50 years, the results shift a bit. Over the trailing half-century, Wall Street’s health barometer has catapulted from 964.81 to its closing value of 50,115.67 on Feb. 6 — an 8.22% annualized return. At this pace, the Dow would achieve six-digit status before the end of 2034.
However, things get really interesting when we consider recent changes made by S&P Dow Jones Indices, which oversees additions, removals, and Dow divisor updates (in the case of stock splits) for the Dow Jones Industrial Average.
Over the trailing decade, the Dow has skyrocketed from 16,204.97 to 50,115.67, working out to a compound annual growth rate of 11.95%. This above-average return rate would see the Dow reaching the 100,000-point milestone in February 2032 — just six years from now.
These outsize returns over the last decade can be attributed to S&P Dow Jones Indices modernizing the index and incorporating several members of the “Magnificent Seven.” Although Microsoft was added in 1999, some of the newer additions include Apple in 2015, along with Amazon and Nvidia in 2024.
Members of the Magnificent Seven have consistently outperformed all of Wall Street’s major stock indexes. More importantly, they possess well-defined competitive advantages and haven’t been afraid to aggressively spend on high-growth initiatives and game-changing technological trends. The Dow’s embrace of Wall Street’s most influential businesses makes the six-year timeline to reach 100,000 quite feasible.
Image source: Getty Images.
While history has made it abundantly clear that the Dow Jones Industrial Average rises over multi-decade periods, predicting short-term directional moves in the index isn’t nearly as precise.
But what could really complicate short-term predictions for the Dow is its point calculation method, which differs notably from the benchmark S&P 500(SNPINDEX: ^GSPC) and growth-propelled Nasdaq Composite(NASDAQINDEX: ^IXIC).
The S&P 500 and Nasdaq Composite are market-cap-weighted indexes, meaning companies with higher market valuations exert greater control over point movements. Magnificent Seven members with trillion-dollar market caps are going to have more sway than fringe members of the S&P 500 that have comparatively small caps of $7 billion to $10 billion.
This isn’t the case with Wall Street’s time-tested stock index, which is a share-price-weighted. As implied, it means a company’s share price, not its market cap, dictates its influence. Although Nvidia is the largest publicly traded company on U.S. stock exchanges, its $185 share price only makes it the 20th-most influential component in the Dow.
As of the closing bell on Feb. 6, investment banking giant Goldman Sachs(NYSE: GS) and construction machinery kingpin Caterpillar(NYSE: CAT) were the two most important companies in the Dow. Despite being the 17th- and 13th-largest members of the index by market cap, Goldman Sachs and Caterpillar account for nearly 5,709 and 4,464 Dow points, respectively. That’s 10,173 of the Dow’s 50,115.67 points represented by just two companies.
The Dow Jones Industrial Average’s ability to sustain a nearly 12% annualized return rate will depend on the companies with the highest share prices (not necessarily the largest by market cap) continuing to outperform. Should Goldman Sachs or Caterpillar undertake a forward stock split at some point, thereby altering the Dow divisor that converts a company’s share price into Dow points, the recipe that’s been working so well for Wall Street’s ageless index could be disrupted.
As things stand now, the Dow has a realistic path to reach 100,000 as early as 2032. But if its longer-term historical returns come into play, the latter half of 2034 or the first half of 2035 are logical targets for the Dow to top 100,000.
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Sean Williams has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Apple, Caterpillar, Goldman Sachs Group, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
