Finance & Jobs

The Market’s Mirror: History, Role, and Future of the S&P 500 and Dow Jones

Dow Jones Industrial Average (DJIA)
The Dow is the “grandfather” of American stock indexes — launched in 1896 by Charles Dow to track a small group of key industrial companies. Today, it is a 30-stock, price-weighted index, meaning higher-priced stocks have greater influence regardless of market capitalization.

S&P 500
The S&P 500, in its current form, debuted in 1957 and tracks roughly 500 large U.S. companies. It is float-adjusted market-cap weighted, so the largest companies by public float move the index the most. Because the S&P 500 represents about 80% of U.S. stock market value, it is widely regarded as the most accurate proxy for the “market.”

What a “Point” Really Means

  • Dow Points: Since the Dow is price-weighted, each $1 move in a component stock moves the Dow by about six points. A headline like “Dow +200” may be driven by just a few high-priced stocks.
  • S&P Points: The S&P 500 reflects market capitalization changes. A 1% gain in the index indicates a roughly 1% increase in the combined float-adjusted market value of its 500 constituents.

Current Constituents
S&P 500

The full list includes 500 companies and changes periodically. The largest weights currently include Nvidia, Microsoft, Apple, Amazon, and Meta. The top ten companies typically make up more than one-third of the index’s value.

Dow 30
The Dow contains just 30 carefully selected “blue-chip” stocks chosen to represent major sectors. Because it is price-weighted, higher-priced shares have an outsized effect on the index.

Qualifications for Inclusion or Removal

S&P 500
Key requirements include:

  • U.S.-based company
  • Minimum market capitalization threshold
  • Adequate liquidity and free float
  • Positive GAAP earnings in the most recent quarter and over the last four quarters
  • Sector balance as determined by the index committee

Dow
There is no strict formula — a committee selects companies with strong reputations, large market capitalizations, and broad investor interest.

Companies Removed in the Last Decade

  • Dow: About eight changes in the past 10 years, including Intel replaced by Nvidia, Sherwin-Williams replacing Dow Inc., and Amazon replacing Walgreens.
  • S&P 500: Roughly 27 additions and deletions occur annually, leading to about 250–300 changes over a decade.

How Retirement Funds Invest in These Indexes

Most 401(k)s, pension plans, and target-date funds allocate heavily to index funds or ETFs such as the S&P 500 (SPY, VOO) and, to a lesser extent, the Dow (DIA).
Benefits: Low cost and broad diversification.
Risks: Heavy concentration in a handful of mega-cap companies can create volatility if those leaders stumble.

Market Performance in 2025 by Quarter

  • Q1: S&P 500 down roughly 4.3%, Dow down 0.9%.
  • Q2: S&P 500 rebounded strongly, up about 10.9%.
  • Q3 (through September): Continued positive performance, supported by improved earnings expectations.

Why Markets Are Strong Despite High Living Costs

  • Markets Are Forward-Looking: Stock prices reflect expectations six to twelve months ahead, not today’s struggles.
  • Inflation Has Cooled: Prices remain elevated, but the pace of increase has slowed.
  • Index Leadership Is Narrow: A few tech giants drive a large share of gains.
  • Unemployment Is Moderate: Around 4.3%, still historically healthy.
  • Consumers Still Feel the Pinch: Many households report living paycheck to paycheck.

Should Retirees Be Concerned?
Reasons Not to Panic

  • Broader participation in S&P 500 gains shows healthier market breadth.
  • Target-date and balanced funds automatically rebalance and spread risk.

Risks to Watch

  • Heavy exposure to mega-cap stocks.
  • Potential policy, geopolitical, or economic slowdowns affecting earnings.

Practical Tips

  • Review asset allocation and maintain cash and bonds for near-term spending needs.
  • Diversify beyond U.S. mega-caps, including international and dividend funds.
  • Keep costs low and rebalance periodically.

-Phan Trần Hương-

Sources & Further Reading