As Rotation from Tech to Value Gains Steam, Is It Time to Buy the Dow Jones by End-2025?

TradingKey - The Dow Jones Industrial Average has reached successive record highs, and its outperformance against the Nasdaq over the past two days reached the highest level in nine months, signaling an early market style shift from tech to blue-chip or value stocks amid persistent concerns about the artificial intelligence bubble.

As of Wednesday, November 12, the blue-chip-heavy Dow Jones Industrial Average climbed for four consecutive trading days, breaking above 48,000 points for the first time ever and marking its 17th record high this year. In contrast, the tech-focused Nasdaq Composite recorded declines on three of the past four trading days.

The prospect of an end to the historic U.S. government shutdown, which lasted over 40 days, fueled the rise in large-cap blue chips. Furthermore, lingering AI bubble concerns across both equity and bond markets prompted investors to look beyond the tech sector towards established Dow components known for stable earnings and often seen as a barometer for the health of the U.S. economy.

U.S. President Donald Trump signed the interim appropriations bill on Wednesday evening, formally ending the longest federal government shutdown in U.S. history, which spanned 43 days and was estimated to have caused $1.5 trillion in losses.

The easing of macro shocks, including reduced policy and fiscal uncertainty, a recovery in economic data, a rebound in fiscal spending, and the resumption of government programs, provided tailwinds for blue-chip stocks.

Following the rebound in healthcare and industrial stocks, Jamie Cox, managing partner at Harris Financial Group, remarked, "The main theme is: Value is back."

In contrast, Empower Investments noted that a significant rebound in tech stocks has not been observed after last week's sell-off, with concerns over AI overvaluation still unresolved.

During the U.S. third-quarter earnings season, despite many tech companies reporting record results, some concerning signals were still released.

CoreWeave, an AI cloud computing company backed by Nvidia, lowered its full-year financial guidance due to delivery delays, with lower-than-expected operating profit margins highlighting pressure to gain market share and scale operations. Additionally, Nebius, whose stock had surged nearly threefold this year, saw a significant widening of its net loss in the third quarter, with revenue also falling short of market expectations.

GMO Domestic Resilience ETF commented that buying AI stocks earlier this year seemed foolproof, as they kept "going, going, going," but now the market is trying to figure out how good the widely touted AI fundamentals truly are.

Historically, U.S. government shutdowns have had little impact on equity performance, but often precede considerable stock market gains in the months following their resolution. As the market questions the upward momentum of growth and tech stocks and re-prices companies with stable cash flows, blue-chip stocks with high dividend yields and stable payouts may gain favor among investors.

Justin Bergner, a portfolio manager at Gabelli Funds, told the Wall Street Journal, "I’m skeptical that there’s going to be some great rotation away from tech that sustains the bull market."

Market results suggest this style rotation is indeed occurring. Companies in pharmaceuticals, consumer staples, and those with strong financial stability are gaining attention. Furthermore, cyclical leaders in infrastructure, energy, utilities, and transportation sectors could also see significant short-term upside potential, bolstered by increased government spending.

Bob Savage, Head of Market Macro Strategy at BNY Mellon, cautioned that it remains to be seen whether this is a sector rotation or the beginning of a deeper correction, though it currently appears to be a rotation.

Given that the tech sector's weighting in the S&P 500 has surged to an all-time high over the past three years, a substantial outflow of capital from tech stocks would significantly impact the broader market, making it difficult for the Dow Jones Industrial Average to remain unaffected.

A tech stock rotation also occurred last summer, when small-cap and value stocks experienced considerable gains, only for it to prove short-lived.

In Savage's view, the fundamental driver behind this sector rotation may be a desire for a smooth transition into year-end, avoiding a collapse of valuation barriers.

Recommended Dow Jones Industrial Average ETFs:

• DIA: SPDR Dow Jones Industrial Average ETF
• DDM: Proshares Ultra DOW 30 (2x Long)
• UDOW: Proshares UltraPro Dow 30 (3x Long)
• DOG: ProShares Short Dow30 (Short)
• DXD: ProShares UltraShort Dow30 (2x Short)
• SDOW: ProShares UltraPro Short Dow30 ETF (3x Short)