Amazon Joined the Dow and Walmart Split Its Stock, but 9 Companies Still Make Up Over 50% of the Index

The Dow Jones Industrial Average is one of the oldest and most respected stock market indexes. On Feb. 26, the index changed forever as Walmart (WMT -0.08%) split its stock and Amazon (AMZN 3.43%) replaced Walgreens Boots Alliance.

It marks the first shakeup since Honeywell International, Salesforce, and Amgen joined the Dow in 2020, replacing RTX, ExxonMobil, and Pfizer.

Here's what really moves the Dow, and why its changing composition represents a major theme sweeping the market.

Image source: Getty Images.

Leaders of the Dow

These are the prices and weightings of the nine largest Dow components as of market close on Feb. 23. They collectively comprise 53.7% of the index.

Data source: CNBC, Slickcharts.

The true value of a company is its market cap, which is the product of the stock price and the number of shares outstanding. For example, a company with 100 shares at $100 a share is worth the same as a company with 1,000 shares at $10 a share. The rather arbitrary price of a stock doesn't matter in the S&P 500, which is weighted by market cap. But it does in the Dow, which is why stock splits matter.

The Dow is a price-weighted index. So, the companies with the highest stock prices make up the largest weights. At roughly $525 a share, UnitedHealth moves the Dow more than any other company right now. In fact, it has the same impact as Verizon, Intel, Cisco Systems, Dow, post-split Walmart, Coca-Cola, 3M, and Nike combined. But if UnitedHealth issued a 10-for-1 stock split, which would reduce share price but not change market cap, it would become one of the least impactful companies.

Apple's stock split in 2020 fueled Salesforce replacing ExxonMobil to add more tech to index. Similarly, Amazon replacing Walgreens is a way to add more retail since retail is losing representation with Walmart's 3-for-1 split. It's also a way to increase the share of tech in the index.

Tech is changing markets

Just like when Salesforce joined the Dow in 2020, the addition of Amazon will make the Dow more tech-oriented. But it's not just the addition of new components that is increasing tech's weight in the Dow, it's also the outperformance of tech stocks.

Five years ago, Microsoft was hovering around $110 a share and was one of the less important Dow stocks. Meanwhile, Boeing was over $400 a share and was the heaviest-weighted stock in the Dow. Oh, how times have changed.

Over the last five years, Microsoft is up 270%, while Boeing has lost more than half its value. Those moves have changed the index, with Microsoft on the brink of becoming the most important stock in the Dow while Boeing is now just 3.4% of the index.

The expansion of tech has also changed the S&P 500. Tech now makes up over 29% of the S&P 500. Even crazier, it is the only sector that has outperformed the S&P 500 over the last five years, which illustrates how a single pocket of the market can drive broader returns.

Understanding the modern U.S. economy

When the Dow Jones Industrial Average was first introduced in May 1896, the U.S. economy was driven by commodity businesses, utilities, and industrialization. The U.S. was still 50 or so years away from becoming a true global superpower. Today, the U.S. stock market is the most dependable and reliable stock market in the world. But the economy has changed. No longer are industrial conglomerates, oil majors, and consumer goods companies driving the market. A single sector and a few major companies set the trajectory of the market.

Industrials make up less than 14% of the Dow, while healthcare, financials, and tech make up nearly 60%. Investing in the stock market today requires an understanding and acceptance of what is going to drive the market, for better or for worse. Tech is what got the market to where it is today, and it will likely dictate where the market goes from here. Ten years from now, it wouldn't be surprising to see all the "Magnificent Seven" stocks in the Dow.