Among the three key U.S. equity gauges, the Dow Jones won in 2022 only to lag the S&P 500 and the Nasdaq in the first half of 2023. SPDR Dow Jones Industrial Average ETF (DIA Quick QuoteDIA - Free Report) has added 5.4% so far this year, falling behind the S&P 500 (up 18.6%) and the Nasdaq (up 37.1%).

The Dow Jones lagged its peers because the Fed has been less hawkish this year, which favored the growth-stock-heavy Nasdaq. Since Dow stocks are value stocks in nature, rising rates were good for value stocks. However, the Dow Jones has been trying to catch up with its peers in the past month as the index rallied 2.64%, whereas S&P 500 and the Nasdaq have added 3.79% and 5%, respectively.

Even if the Dow Jones underperforms its heavyweight peers in 2023, there are some factors that can fuel the Dow rally in the second half of 2023. Let’s delve a little deeper.

Inside the Potential for a Rebound

Ebbing Recession Fears

Recessionary fears are ebbing in the United States. Goldman Sachs expects a 20% chance of a U.S. recession in the next 12 months, per a Yahoo Finance article. The firm had initially predicted a 25% probability of a recession, which is significantly lower than the 54% chance indicated by the consensus estimate mentioned in the Wall Street Journal, as quoted in the Yahoo article.

With the U.S. economy witnessing upbeat economic data points and the second-quarter earnings season unfolding in a decent manner, Goldman Sachs lowered its recession forecast. Bank of America (BAC) CEO Brian has also cut back his expectation for a mild recession this year mainly due to the resilience of the U.S. consumer, as quoted in Yahoo Finance.

The University of Michigan Consumer Sentiment Index for July jumped to its highest level since September 2021, indicating growing confidence in the U.S. economy.

Steepening Yield Curve in the Cards?

As recessionary fears are ebbing and inflation has been falling, the Fed is likely to go slow in its policy tightening spree. The July rate hike is almost sanguine, but the CME Fed Watch Tool reveals that rate hikes in September and November are less likely. Both situations will result in a steepening of the yield curve. So far this month, the yield curve has tended to steepen. A steepening yield curve is great for bank stocks as the pattern boosts banks’ net interest rate margins.

Upbeat Big Bank Earnings May Cause Revival in Dow Jones

The Dow Jones has the highest exposure (20.36%) to financial stocks, followed by Information Technology (18.81%) and healthcare (18.81%). Healthcare stocks are recession-proof. UnitedHealth Group (UNH), a prominent component of the Dow with 9.15% exposure, surged after beating Wall Street estimates in its second-quarter results. The health insurer also raised its full-year profit outlook, citing cost-cutting measures.

Then again, big bank earnings showed promise in the ongoing earnings reporting season on strong consumer-led businesses. Most big banks have come up with both line beats this reporting season. Information Technology giants, in any case, are in great shape this year, owing to the AI craze. Industrials stocks have also been trying to log a recovery, as evident by the space’s solid Zacks Rank of #4 (see Zacks Sector Rank / Industry Section). 

Relatively Cheaper Valuation

Cheaper valuation is another tailwind. At the current level, Dow Jones has a P/E of 16.82X, whereas the S&P 500 has a P/E of 17.86X and the Nasdaq-100 has a P/E of 22.70X. This was because the Dow Jones suffered a lot in the first half of 2023, which provided the index the scope to fare better in the second half. Against this backdrop, investors can bet on iShares Dow Jones U.S. ETF (IYY Quick QuoteIYY - Free Report) and DIA.