After the Midterm Rally, the Dow Is on Track to Beat the Nasdaq for the First Time Since 2022. Here's What History Says Could Come Next.
The Dow tends to outperform the Nasdaq during growth stock-driven sell-offs.
Following the midterm elections, the Dow Jones Industrial Average surged ahead of the S&P 500 and Nasdaq Composite in the first trading session. As of November 4, the Dow was up 11% year-to-date, outpacing the Nasdaq's 10.7% gain. This is a stark contrast to just one month prior when the Nasdaq led the Dow by over ten percentage points.
The difference in performance between the two indexes could be attributed to the Democrats' potential takeover of the House and Senate, which may lead to stricter AI regulations and slower AI data center build-out. The Nasdaq had already been experiencing a steep decline leading up to the elections, and higher interest rates make borrowing capital to fund AI spending more expensive.
Major companies like Alphabet, Amazon, and Meta Platforms have been heavily investing in AI technology, resulting in negative free cash flow and a sell-off in the semiconductor industry, further weighing on the Nasdaq. Investors have become increasingly concerned about AI-related capital expenditures, particularly from companies like Alphabet, Amazon, and Meta Platforms.
A potential Anthropic public listing could also add more scrutiny and doubt to the broader AI investment thesis. Historically, the six months following midterm elections have been a seasonally favorable period for the stock market. Over the long term, tech-focused companies like Apple, Nvidia, and Microsoft, which are more heavily weighted in the Nasdaq, have shown impeccable earnings growth rates.
While AI capex is a strain on free cash flow for hyperscalers, it's crucial not to overlook the operational efficiency of top Nasdaq stocks. Safe sectors like consumer staples and healthcare can also rally during uncertain times due to their recession-resistant nature. However, tech-focused companies are expected to continue outperforming the Dow over the long term, as they have more opportunities to invest in high-potential ideas that offset the ones that don't work out.
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