Will the Dow Jones Industrial Average crash? The story presents a potentially troubling tale.

Whether you realize it or not, this is a big week for the Timeless Dow Jones Industrial Average (^DJI). After trading closes today, November 7th, a new era begins for the Dow: Two market-leading companies will be included in the index and two long-standing traditional companies will be shown the door.

On Friday, November 1, the committee that oversees entries and exits from this 30-component index announced that the semiconductor stock is in trouble Intelwhich has been included in the Dow Jones for 25 years, and specialty chemicals company Dow Inc.which was part of the DowDupont spinoff in 2019, is given the go-ahead.

In contrast to the broad base S&P 500 (^GSPC) and growth-driven Nasdaq Composite (^IXIC)the Dow Jones Industrial Average is stock price-weighted. Intel and Dow Inc. were two of the three components with the lowest share prices and therefore the least influence within the index.

Image source: Getty Images.

Dow's 53rd change in constituent parts, which dates back to its incorporation on May 26, 1896, will include the painting and coating products company Sherwin Williams Replace Dow Inc. and the artificial intelligence (AI) juggernaut. Nvidia (NVDA) Kick Intel to the curb. Nvidia's historic 10-for-1 stock split in June, which pushed its share price down above $1,300, allowed entry into the Dow.

While most investors will likely view the addition of Nvidia as a long-overdue move for one of America's most influential companies, history suggests it may have plunged Wall Street's most famous index into disaster.

The story presents a real problem for the Dow Jones Industrial Average

On paper, Nvidia's rise was textbook. Demand for the company's AI graphics processing units (GPUs) has been exceptionally strong. With a backlog of orders for its H100 GPU (commonly known as “Hopper”) and Blackwell's successor GPU architecture, Nvidia has managed to gain unimaginable pricing power for its hardware, pushing its gross margin to the mid-70th percentile to increase.

What cannot be overlooked is that the CUDA software platform has played an important role in attracting customers to Nvidia's solution ecosystem. CUDA is the toolkit that developers use to maximize the potential of their AI GPUs, including building large language models.

While this all seems like great news for the recent Dow index, history stands in the way of Wall Street's most revered index.

Over the past 30 years, every next big innovation, including the introduction of the Internet, has experienced a bubble-bursting event relatively early in its expansion cycle. This means that investors undoubtedly overestimated how quickly a new innovation or technology would be adopted and used.

While strong demand for AI hardware and data center infrastructure suggests that artificial intelligence may be the exception to the rule, the reality is that most companies lack a real game plan to achieve a positive near-term return on their AI investments. There's a big difference between companies that buy hardware from Nvidia and those that truly understand how they can use AI to increase their sales and profits. Most of the last part has not yet been reached.

If history repeats itself and the AI ​​bubble bursts, no company would be hit harder than Nvidia. But it's not the only Dow component that would feel the pinch. Microsoft's cloud infrastructure services platform Azure and AmazonAmazon's cloud infrastructure service, known as Amazon Web Services, heavily integrates AI solutions. IBM, AppleAnd Salesforce are also dependent on AI for their future growth.

A blowout event, which history says is coming, would undeniably be bad news for the Dow Jones Industrial Average and could cause the legendary index to crash.

Image source: Getty Images.

But wait – there is also a silver lining

On the other hand, there is a small ray of hope amid history's seemingly dire predictions for this timeless index.

As I mentioned earlier, the Dow Jones differs from the other two major Wall Street indices in that it is based on the stock price rather than the market capitalization of its underlying components. While the Nasdaq Composite and S&P 500 are overwhelmingly tied to the performance of the current and former trillion-dollar companies that make up the “Magnificent Seven,” that is simply not the case with the Dow Jones Industrial Average.

Even if Nvidia challenges Apple to become the largest publicly traded company, it will only be the 22nd most influential company when it joins the Dow. In fact, it will have the lowest impact of all the technology stocks currently included in the index.

Meanwhile, many of the major Dow stocks – those with the highest stock prices – have virtually nothing to do with the AI ​​revolution. UnitedHealth Groupwhich has the biggest impact on the Dow, wouldn't see a decline in insurance demand just because companies haven't figured out how to properly monetize their AI investments. The same also applies to Goldman Sachs, Home Depot, caterpillar, Amgen, McDonald's, visaAnd American Expressall of whom are among the top 10 influencers in the Dow based on their respective stock prices.

In other words, the Dow Jones could actually outperform the S&P 500 and the Nasdaq Composite, even if all three would be damaged by a bursting of the AI ​​bubble.

It's also important to remember that the bursting of a bubble does not mean the end of a new technology or the companies leading the trend. Although the dot-com bubble has ravaged technology stocks and Internet-based companies for several years, there is no denying that the Internet has transformed the growth potential of American companies. Once a technology is mature and companies have a concrete plan for its use, the sky is the limit.

Although history says that the AI ​​bubble will eventually burst, there are also many promises that artificial intelligence will significantly improve companies' growth prospects in the long term.