The Dow deletion effect suggests Intel might be positioned for outperformance. Yet Nvidia’s AI leadership suggests otherwise.
Nvidia replacing longtime member Intel in the Dow Jones Industrial Average earlier this month is more than just a name change. It presents a fascinating test case of whether traditional market patterns hold up in the artificial-intelligence era.
History tells us that getting kicked out of the Dow might be the best thing that could’ve happened to Intel. Research from market analyst Research Affiliates reveals that between 1991 and 2023, a portfolio of stocks deleted from major indexes would have made investors 74 times wealthier than the alternatives.
This isn’t a recent phenomenon. A comprehensive study by researchers at Pomona College found that between 1928 and 2005, stocks removed from the Dow beat their replacements in 32 out of 50 cases. On average, deleted stocks showed a 19.3% increase in value 250 trading days after being removed, while newly added stocks managed only a 3.37% gain. By year five, deleted stocks had grown to 2.73 times their original value, while additions reached 1.65 times their initial value.
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Perhaps no case illustrates this pattern better than IBM’s 1939 removal from the Dow. When the index dropped IBM in favor of AT&T few could have predicted the magnitude of the mistake. By the time IBM returned to the index in 1979, its stock had multiplied 562 times in value, while AT&T had barely managed to triple. In fact, this single decision accounts for a large portion of the deletion effect’s historical success between 1939 and 1979.
So, what drives this counterintuitive performance? According to Research Affiliates, two key factors are at play:
- Long-horizon mean reversion: Companies often get deleted at their lowest point, which creates the potential for recovery.
- The liquidity effect: When stocks are removed from an index, the resulting selloff can push prices well below their fundamental value. With more than 20% of the S&P 500’s total market capitalization now controlled by index funds, these forced sales can create significant price pressure.
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The deletion pattern is particularly striking in its consistency. The research shows that when deletions outperform the Russell 2000 Value Index, they win by more than 18%, on average. In their record year, 2009, deleted stocks exceeded their benchmark by 90%. Even in years when they underperform, the average shortfall is only 5.3%.
There’s no slow decline anymore; when a tech company starts falling behind, the drop can be precipitous.
However, a thought-provoking analysis by Dividend Growth Investor got me thinking: Is the reliable deletion pattern breaking down? Looking at Dow changes after 2005, deletions outperformed in just four out of 14 cases. The magnitude of the reversal is significant — $10,000 invested in each Dow deletion would have grown to $180,609; the same amount in Dow additions reached $227,540.
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The explanation might be simple: The pace of technological shifts has fundamentally changed. The Nvidia-Intel switch perfectly illustrates this. In just eight years, Nvidia has transformed from a $22.3 billion company in May 2016 to a $3.6 trillion giant today. The company now commands 70%-95% of the AI chip market. Meanwhile, Intel has watched its CPU market share decline to 62% in the third quarter of 2024, with rival AMD reaching a record 35.5% share.
These numbers represent a fundamental shift in how technology companies build and maintain market leadership. When IBM was deleted from the Dow in 1939, it took 40 years to prove the mistake. Today’s technology shifts happen in quarters, not decades.
Furthermore, the semiconductor industry plays by entirely different rules compared to the old industrial giants. While traditional companies could maintain their position through sheer size and manufacturing capability, today’s tech landscape is far more dynamic. Success and failure play out at breakneck speed — a company can go from market leader to struggling survivor in just a few quarters. There’s no slow decline anymore; when a tech company starts falling behind, the drop can be precipitous.
Just as importantly, when a company pulls ahead in today’s market, it tends to dominate in a way old manufacturers never could. Take Nvidia’s CUDA platform — once developers and businesses start building on a company’s technology, it becomes incredibly difficult to switch to a competitor. It’s not just about making better chips anymore; it’s about becoming the foundation that others build upon, creating an ecosystem that becomes self-reinforcing over time.
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For investors watching this transition, the Nvidia-Intel switch presents a complex decision. The Dow deletion effect suggests Intel might be positioned for outperformance based on historical patterns. The company retains significant manufacturing capabilities and a still-dominant position in CPUs. Yet Nvidia’s AI leadership suggests traditional mean reversion might not apply.
Perhaps the most intriguing possibility is that we’re asking the wrong question altogether. Instead of debating whether the deletion effect will hold true for Intel, we should be questioning whether traditional metrics of market leadership — even membership in the Dow — remain relevant in an era where artificial intelligence is rewriting the rules of value creation at an unprecedented pace.
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In the end, the Intel-Nvidia switch may be remembered not for the deletion effect, but for marking the moment when our market compasses needed recalibration for a new economic age.
