In-Depth Analysis of Major US Indices: S&P 500, Nasdaq, and Dow Jones

US indices are some of the most important indicators of the American economy. These indices show the overall health and performance of the US financial market. 

The three major US indices investors and traders closely monitor are the S&P 500, Nasdaq, and Dow Jones Industrial Average. Each index represents a different market segment and has its unique characteristics. 

In this article, we will delve into the complexities of these indices, analyze their historical trends, and discuss the factors that influence their performance.

What exactly is the S&P 500 index?

The S&P 500, formally known as the Standard & Poor’s 500, is a market capitalization-weighted benchmark index designed to monitor and measure the performance of precisely 500 of the largest, most prominent, and historically influential publicly traded corporations in the United States.

It is considered a benchmark for the overall US financial market and is widely used by traders and fund managers. 

Development of S&P 500 index

The S&P 500 index considers only the shares of a company that is available for trading by the public when figuring out its market value. If a company issues new shares or merges with another, the S&P adjusts the company’s market value to keep things fair.

The value of the index is calculated by adding up all the adjusted market values of the companies in it. Then, they divide that total by a secret number called the “divisor,” known only to the S&P and not shared with the public.

What influences the market performance of the S&P 500

A multitude of factors impact the performance of the S&P 500. One of the primary factors is the overall state of the economy. When the economy is in a growth phase, the S&P 500 tends to perform well as companies generate higher revenues and profits. 

Conversely, during economic downturns, the index may experience a decline. Other factors that impact the S&P 500 include interest rates, inflation, geopolitical events, and corporate earnings reports.

Analyzing historical trends in the S&P 500

Over several decades, the S&P 500 has charted a remarkable journey characterized by a prevailing theme of long-term growth. 

Since its formal inception in 1928 through 31 Dec 2022, it has exhibited an average annualized return of 9.82%. Subsequently, after adopting 500 stocks into the index in 1957, the S&P’s average annualized return, spanning from that pivotal year through 31 Dec 2022, stands at 10.15%.

While this trajectory has been punctuated by occasional market downturns and periods of volatility, it’s noteworthy that the index has demonstrated an inherent resilience and propensity to rebound, reaching 10.15%.

However, it is crucial to emphasize that the past is not a predictor of the future. While historical trends can provide valuable insights, they do not offer guarantees or certainties about the index’s future performance. 

What is the Nasdaq index?

The Nasdaq is one of the major US indices that focuses on the technology sector. It is home to many prominent technology companies, including Apple, Microsoft, and Amazon. 

The Nasdaq Composite Index includes more than 3,000 stocks, making it one of the broadest indices in terms of coverage. Investors and traders interested in technology often consider the Nasdaq a barometer of the industry’s performance.

Key components of the Nasdaq index

The Nasdaq comprises various sectors, with technology being the most dominant. As of 26 Aug 2022, Nasdaq has released its top 10 constituents. Here is the list of the companies: 

1. Apple, Inc. (AAPL)
2. Microsoft Corporation (MSFT)
3. Alphabet, Inc. Class C (GOOG)
4. Alphabet, Inc. Class A (GOOGL)
5. Amazon.com, Inc. (AMZN)
6. Tesla, Inc. (TSLA)
7. Meta Platforms, Inc. (META)
8. NVIDIA Corporation (NVDA)
9. PepsiCo, Inc. (PEP)
10. Costco Wholesale Corporation (COST)

Aside from the listed sectors above, the index includes consumer discretionary, healthcare, communication services, and industrials. 

Note that the weighting of each sector within the index can shift over time based on market situations and the performance of individual companies.

What moves the Nasdaq index?

Various factors can move the Nasdaq indices, such as the impact of the share price of companies, market sentiments, and political events. 

Impact of share price

The index is essentially a composite of weighted stock prices, where, in essence, rising stock prices will contribute to an increase in the trade index’s value, while declining stock prices will have the opposite effect. It’s crucial to remember that the Nasdaq index applies varying weightings to company stocks based on their market capitalization.

Market sentiment’s effect

Traders may shift their focus and capital allocation among different sectors that form the Nasdaq index based on market sentiment. For example, during periods of optimism, traders may favor technology and growth stocks, which are prevalent in the Nasdaq. It can increase buying activity in these sectors and boost the Nasdaq index.

As a weighted index, a substantial increase or decrease in the stock price of just one of the top 10 companies has the potential to influence the overall index’s price.

Political events

The impact of new policies or regulations on businesses can extend to the entire index. 

For instance, if a government introduces a tax incentive program to promote renewable energy, companies in the renewable energy sector may benefit significantly, leading to potential growth in their stock prices. 

If a substantial number of these renewable energy companies are part of the index, their positive performance can contribute to an overall increase in the index’s value.

Conversely, a policy change that imposes strict regulations or tariffs on a specific industry, like international trade restrictions on technology companies, could negatively affect the business environment for companies within that sector. 

Suppose several of these technology companies are in the index. In that case, their challenges may lead to a decline in their stock prices, thereby impacting the index’s overall performance downward.

The Dow Jones Industrial Average explained

The Dow Jones Industrial Average, often referred to as the Dow, is the oldest US stock market index. Many professionals consider it an inadequate representation of the overall US financial market compared to a broader market index such as the S&P 500. 

This index comprises 30 prominent, blue-chip company leaders in their respective industries. 

Similar to other US indices, the Dow is price-weighted, meaning that the higher-priced stocks have a more significant impact on the index’s performance.

The current performance record of the Dow Jones

On 16 Feb 2021, the Dow Jones Industrial Average reached 31,522.75 points. It achieved a historic peak of 34,200.67 points on 16 Apr 2021. Throughout the autumn, the Dow consistently closed above the 35,000-point mark, and by the final week of December 2021, it had exceeded 36,000 points.

Subsequently, following its record high in January 2022, the Dow faced a decline in response to factors such as inflation and the conflict in Ukraine. On 30 Sept of that year, it reached its lowest point, touching 28,715.85. However, it gradually recovered, with intermittent dips along the way, ultimately closing at 35,061.21 as of the market’s close on 19 Jul 2023. 

It’s crucial to understand that these records do not guarantee favorable returns when trading. The outcome largely hinges on your specific trading strategy and the various factors influencing the movements of the index’s prices.

Comparing the performance of the S&P 500, Nasdaq, and Dow Jones

• Industry exposure: The Dow Jones Index encompasses 9 out of the 11 sectors that make up the US economy. Meanwhile, the S&P 500 and the NASDAQ Index cover all 11 industries. 

However, it’s worth noting that the NASDAQ substantially emphasizes the technology sector, accounting for approximately 40% of the index’s composition.

• Number of company stocks: The Dow Jones Index comprises 30 stocks, offering a relatively narrow market representation. In contrast, the S&P 500 includes approximately 500 stocks, and the NASDAQ Index tracks more than 3,000 individual stocks, providing broader market coverage.
• Weighting methodology: The Dow Jones employs a price-weighted method, meaning stocks with higher share prices influence the index’s movements. On the other hand, both the S&P 500 and the NASDAQ rely on market capitalization as the basis for their weighting. 
• Top holding companies: While many technology giants such as Amazon (AMZN), Alphabet (GOOGL), Facebook (FB), and Tesla (TSLA) play significant roles in the S&P 500 and the NASDAQ, they are not part of the Dow Jones Index. 

The Dow Jones focuses on a narrower selection of companies, which may exclude some prominent tech companies from its composition.

An article worth reading about indices: How to trade indices

Trade US indices through CFDs at markets.com

In conclusion, the S&P 500, Nasdaq, and Dow Jones are major US indices that provide insights into the performance of the US financial market. 

These US indices are driven by their historical market performance and price factors. While past performance does not indicate future results, analyzing historical data can provide a helpful framework for understanding the potential trajectory of these indices. 

If you are ready to conquer indices trading, you can trade it through a contract for difference (CFD). In this type of trading, you will be speculating the price of your chosen indices without having an actual asset. 

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When considering "CFDs" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.