The Dow Jones Industrial Average reached a significant milestone, surpassing the 40,000 level for the first time. Although it closed slightly below at 39,869, earlier in the day, it had traded as high as 40,021. This achievement marked a 23% gain from its late October low of 32,417 and follows its first touch of 30,000 in November 2020.
John Lynch, Chief Investment Officer for Comerica Wealth Management, attributed this milestone to the powers of innovation, profit growth, and economic resilience. He noted that recent gains in the index have been widespread across its 30 components.
The surge in equities comes amidst moderate economic growth, without concerns of rapid inflation. This economic backdrop suggests that the Federal Reserve is unlikely to raise interest rates, despite uncertainty about when it might cut them. Job growth continues, albeit at a slower pace than expected, indicating a healthy yet not overheating economy. The recent Consumer Price Index data showed a slight decline in the annual pace of inflation from the previous month.
Investors have shown confidence in tech giants like Amazon, Microsoft, and Salesforce, anticipating double-digit profit growth driven by advancements in artificial intelligence. Additionally, stocks benefiting from growing consumer and business demand, such as Home Depot, American Express, Visa, Caterpillar, and Honeywell, have seen significant gains. Banks, including JPMorgan Chase and Goldman Sachs, have also performed strongly this year, buoyed by increased mergers and acquisitions activity and an expanding economy.
Although borrowing costs remain higher due to previous Fed rate hikes and prices for goods and services are elevated compared to pre-COVID levels, signs of economic normalization are emerging. The Dow’s forward earnings multiple, while higher than at the start of the rally, remains reasonable, leaving room for further gains. Technical analysis supports this outlook, with the index’s 200-day moving average rising consistently since late October, indicating sustained investor interest.
In conclusion, the Dow’s historic milestone reflects a resilient market buoyed by technological innovation, moderate economic growth, and stable corporate earnings. While risks remain, including higher borrowing costs and lingering inflation, the overall outlook is positive, with potential for further gains as the market navigates the economic landscape.