What influences the prices of major global indices?
Find out what drives the prices of the S&P 500, Dow Jones Industrial Average, FTSE, and DAX here.
As mentioned in the Introduction to Index Trading, price changes in an index are determined by the stocks it tracks. Various industry news, earnings reports, and political decisions can influence price movements within these indices.
However, each benchmark index tracks a different group of stocks, meaning each reacts to different factors. Let’s look at a few specific examples.
-
S&P 500
-
Dow Jones
-
FTSE 100
-
DAX
S&P 500
The S&P 500 is a massive index that tracks the 500 largest publicly traded companies in the world’s largest economy. The total market capitalization of these stocks exceeds $30 trillion – more than ten times the value of the FTSE 100.
Due to its broad coverage, no sector has complete dominance in the S&P 500, although technology has become a strong player. While technology stocks make up roughly half of the NASDAQ 100, they only account for 20-30% of the S&P 500.
Most traders view the S&P 500 as a general indicator of the U.S. economy. If the U.S. economy is in a growth phase, the S&P 500 typically grows as well. Conversely, during a recession, its value tends to decline.
However, some stocks can have a significant impact on the overall index. Due to its capitalization-weighted model, the ten largest U.S. companies make up about a quarter of the total value of the S&P. The FAAMG stocks – Facebook (now Meta), Apple, Amazon, Microsoft, and Google (Alphabet) – account for around 20% of the S&P’s movements.
Although the S&P 500 is not primarily a technology-focused index, any changes that impact the largest tech companies are likely to be reflected in the value of this index.
Dow Jones
Both the Dow Jones and the S&P 500 track the performance of the U.S. stock market, but they do so in completely different ways.
The Dow focuses on 30 companies, which are selected manually, rather than concentrating on the largest stocks by market capitalization. As a result, some key U.S. stocks are often absent from the Dow index.
Additionally, the DJIA places greater emphasis on companies with higher stock prices. In practice, this means that companies like UnitedHealth Group, Home Depot, and Goldman Sachs – which have high stock prices – may make up more than 20% of the index's total weight.
In contrast, Apple makes up less than 3%.
Despite these differences between the indices, the Dow Jones and the S&P 500 often move in very similar ways. Look at the chart below – historically, there have been few periods where these two indices displayed significantly different trends.
Given this correlation, factors that affect the S&P will likely have a similar impact on the Dow. Economic growth in the U.S. will have a positive effect, while negative news will lead to a decline. However, it is important to note that it is not guaranteed that these two indices will continue to exhibit this correlation in the future.
FTSE 100
The FTSE 100 is historically dominated by three main sectors:
-
Financial services (HSBC, Lloyds, Barclays)
-
Oil and gas (BP, Royal Dutch Shell)
-
Consumer goods (Unilever, Diageo, British American Tobacco)
Each of these sectors can account for about 20% of the total weight of the index, meaning they have a significant impact on its price.
One of the most important factors to watch when trading the FTSE 100, however, is the price of the British pound.
GBP and FTSE 100 have historically shown a strong negative correlation. When the pound is strong, FTSE tends to decline; when the pound is weak, FTSE may experience growth.
Why is this the case? Because many of the companies in the FTSE 100 are highly international. Around 70% of their profits come from outside the UK. When the pound is weak, these export-oriented companies earn more money in terms of pounds, which leads to an increase in the FTSE 100.
For example, after the Brexit vote in 2016, the pound significantly weakened. This decline provided an advantage to companies within the FTSE 100, enabling the index to reach new records despite political uncertainty.
On the other hand, the FTSE 250 is much more focused on the domestic economy. If you want to express a view on the strength of the British economy, the FTSE 250 might be a better choice.
