The Dow Just Hit 40,000 for First Time. What Comes Next.

amazon, microsoft, the dow just hit 40,000 for first time. what comes next.

The Dow Jones Industrial Average cracked the 40,000 level for the first time. Investors should hold on for more gains.

On Thursday, the Dow moved above the milestone, trading at 40,021 by late morning. At 40,000, it had a 23% gain from the low point of 32,417 it reached in late October. It first touched 30,000 in November 2020.

“This achievement is a testament to the powers of… innovation, profit growth, and economic resilience,” wrote John Lynch, chief investment officer for Comerica Wealth Management.

The recent gains have included many of the index’s 30 components.

The surge in equities comes as the economy continues to grow moderately, but not so rapidly that the market is concerned about another flare-up of inflation. That means the Federal Reserve, while uncertain about when it will cut interest rates, isn’t likely to lift rates from here.

The U.S. economy continues to add jobs, though the most recent employment report revealed fewer jobs than expected, another signal that the economy isn’t so hot that the Fed needs to raise rates. The April consumer price index showed a small decline in the annual pace of inflation from March’s rate.

Investors have continued to buy up Big Tech names such as Amazon.com, Microsoft, and Salesforce, which are expected to see double-digit profit growth annually for the next several years as they use artificial intelligence to improve their products and create new sources of revenue.

Stocks of companies whose earnings rise when demand from consumers and businesses is growing have taken off as well. Home Depot, American Express, Visa, Caterpillar, and Honeywell are examples.

Banks have had strong runs, too. JPMorgan Chase and Goldman Sachs are up 18% and 20%, respectively, this year. Mergers and acquisitions are rebounding following a weak showing last year as buyers gain confidence in the outlook for profits at target companies. Meanwhile, an expanding economy supports growth for the companies’ lending businesses.

Goldman has added 1,500 points to the Dow since it was at 30,000, making the stock the index’s largest contributor since then, according to Dow Jones Market Data.

Of course, the current combination of a healthy economy and technological innovation doesn’t mean there are no risks for stocks. There always are.

Borrowing costs will remain higher than before the Fed began raising rates to fight inflation. And prices for goods and services are well above pre-Covid levels, crimping consumers’ spending power.

Still, in a sign that normality is returning to the economy, the personal consumption expenditures index, the Fed’s preferred gauge of inflation, rose 2.7% in March, down from its peak of 6.8% in the summer of 2022.

The Dow, at 18.4 times 12-month forward earnings, isn’t cheap. It was at 15.9 times at the start of the rally, according to FactSet. Still, that valuation isn’t egregious, and leaves room for more gains. The Dow’s multiple is 12% below the S&P 500’s.

Technical analysis also points to gains. The index’s 200-day moving average has risen since the end of October, meaning that even though prices have risen, traders keep piling in when the market dips, sending the average of daily prices higher.

“The recent technical momentum and fundamental strengths, including earnings and interest rates, suggest further near-term gains,” Lynch wrote.

The Dow—and many large-cap stocks across sectors—are alive and well.

Write to Jacob Sonenshine at [email protected]

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