The Nasdaq Composite has established a substantial lead over the Dow Jones Industrial Average this year, with a margin of outperformance reaching approximately 19%. This is the widest margin of outperformance seen since 1991, according to Dow Jones Market Data, as quoted on MarketWatch.

It is quite uncommon for the tech-heavy Nasdaq Index to surpass the Dow by such a significant margin over the past 50 years. Based on the Dow Jones Market Data, this marks the first time since the Nasdaq's inception in 1971 that the index has recorded a year-to-date increase of more than 21% while the Dow has remained in negative territory for the year.

Looking back to the early 1990s, many of the current leading companies in the Nasdaq index either did not exist yet or were relatively small in terms of market capitalization. For instance, Apple Inc. (AAPL) went public in 1980, after the period being discussed.

What’s Behind Nasdaq’s Gain & Dow’s Pain

Chances of the Federal Reserve cutting interest rates or staying put, lower Treasury yields, U.S. recession fears, continued regional banking crisis in the United States and AI mania are driving interest in mega-cap technology names, which appear to be safe bets.

Also, investors seeking security amid concerns ranging from the debt ceiling to a potential U.S. banking crisis have found solace in mega-cap stocks like Google parent company Alphabet, Microsoft Corp., and Amazon.com. These stocks have garnered appeal due to their robust financial positions and reliable cash flows, making them enticing investment options in recent months.

Last year was troublesome for these stocks. Their valuation got corrected massively, which led to a rally this year on lower rates. Inflation is showing signs of easing.  While this acts as a tailwind for the tech-heavy Nasdaq, the Dow Jones faltered for the very same reason. The Dow Jones is more value-centric and fares better in a high-inflation and higher-rate environment. On the other hand, the Nasdaq is growth-oriented and performs better in a low-rate environment.

What Lies Ahead? 

If a deal on the debt ceiling is reached, chief market strategist at Jones Trading Michael O'Rourke predicts a reversal in the above-mentioned pattern, with the market broadening out and potentially outperforming the mega-cap stocks, as quoted on Yahoo Finance, as the overall market is pricing in more risk.

Signs of progress in debt ceiling discussions have led to a decline in credit default swaps and increased optimism among global fund managers that a deal will be reached. If a deal is made, investors may shift to shorter-term U.S. Treasury maturities and sectors benefiting from the strong U.S. economy, such as consumer discretionary.

However, concerns about the Federal Reserve's monetary policy tightening and the recent turmoil in the banking sector are likely to persist even if a default is avoided. Overall, there is anticipation for a broader equity rally and investors seeking areas that can generate revenues if economic growth slows down, with healthcare being one sector viewed as a haven during uncertain times.

Having said that, investors are unlikely to dump tech stocks entirely, after a decade of market-leading performance. The excitement surrounding artificial intelligence and its association with mega-cap companies will also provide further support to the tech stock category.

ETFs in Focus

If the above-mentioned theory holds good, SPDR Dow Jones Industrial Average ETF (DIA Quick QuoteDIA - Free Report) would bounce back. The fund has a 19.18% focus on healthcare, 17.90% exposure to technology and 13.9% focus on Consumer Discretionary. The fund also has a Zacks Rank #1 (Strong Buy).

Meanwhile, Nasdaq-100 ETF Invesco QQQ (QQQ Quick QuoteQQQ - Free Report) has a Zacks Rank #2 (Buy). But the fund has considerable exposure to Information Technology and Consumer Discretionary.