Microsoft Closing in on UnitedHealth as Dow's Top Stock with Strong Growth Prospects

Bad news for health insurance companies

It's uncommon to see a stodgy dividend-paying insurance provider fall big for a non-earnings-related reason. But that's exactly what happened to health insurance companies on April 2 when the federal agency that administers the Medicare program approved a lower-than-expected rate increase. Some health insurance companies were expecting a larger increase to keep up with rising medical costs. Even after the sell-off, UnitedHealth is still up 87% over the last five years -- outperforming the S&P 500. The outperformance is one reason why UnitedHealth has grown to become the most important stock in the Dow Jones Industrial Average -- which weights components based on their rather arbitrary stock price rather than market cap.

Microsoft is more expensive for good reason

The easiest way for a stock to go up is to grow earnings or chart a path toward accelerated earnings growth. Microsoft has done the trifecta of undergoing a valuation expansion with a higher multiple, boosting earnings toward record highs, and accelerating its top- and bottom-line growth rate, largely thanks to artificial intelligence (AI) monetization and the growing need for cloud infrastructure.

Entering a new growth gear

The company has gone from a moderate-margin, moderate-growth company to a high-margin, faster-growth company. Ten years ago, Microsoft's trailing-12-month (TTM) revenue was less than $100 billion, and its margins were in the low 30% range. Now, it is earning TTM revenue above $225 billion, and its operating margin is at a 10-year high of 44.2%.

Microsoft is moving markets

At the end of the day, being the most important component in all three major indices would mean little more than bragging rights for Microsoft. But it is useful to know what makes up an index and how sector weights and component weights can move the market. For example, five stocks have contributed the vast majority of the S&P 500's 2024 gains. A high weighted component that goes on a run, like Nvidia, can move the whole market.