By Akane Otani 

The Dow Jones Industrial Average raced past its rival indexes in October, as a pickup in economic growth around the world boosted shares of blue-chip firms that sell everything from bulldozers to airplanes.

The rally has put the Dow industrials on track to outperform the S&P 500 by the largest margin in a month since November 2008. The Dow industrials are up 4.2% for the month through Monday, while the S&P 500 has gained 2.1% and the Nasdaq Composite has risen 3.1%.

The reason for the divergence, analysts and investors say, is the 121-year-old Dow industrials are packed with large multinational firms reaping benefits as the world's major economies grow in sync for the first time in a decade. The economic upswing, combined with a weaker U.S. dollar and rebounding commodity prices, has helped Dow components post quarterly profits that have so far outshone results in the broader S&P 500 index of large U.S. companies.

As of Monday's close, with more than two-thirds of the Dow industrials' components having reported earnings results for the latest quarter, the index was on track to post earnings growth of 6.1% from the year-earlier period, according to FactSet, which combines actual earnings with analysts' estimates for those yet to report. The S&P 500's expected earnings growth rate is 4.5%, according to FactSet. If the Dow holds its lead over the S&P, it would mark the third straight quarter it reported higher earnings growth than the S&P 500.

Because the Dow industrials are price-weighted and count just 30 components -- compared with the S&P 500, which has 500 companies that are weighted by market capitalization -- individual stocks can exert outsize influence on the Dow industrials' overall performance. For instance, Boeing Co., which is the priciest stock in the blue-chip index at $259 a share, accounts for most of the index's gain this year. The S&P is dominated by tech companies such as Apple, which has a market value of more than $800 billion.

"When you think about the stocks that have really led the Dow for its last thousand points, they're all benefiting from global growth," said Art Hogan, chief market strategist at brokerage Wunderlich Securities. "It's not as if the S&P doesn't have a good percentage of revenues driven from the overseas economy, but when you have a price-weighted index with only 30 names, you're going to see some outperformance there if your biggest driver is global growth."

Still, if the forces that have disproportionately benefited large U.S. exporters throughout the year reverse course, similar to what happened in the fall of 2015 and in early 2016, stocks could come under pressure. Back then, investors grew increasingly concerned China's economy was slowing dramatically, sending the Dow industrials tumbling nearly 600 points in a day and oil prices to multiyear lows.

But this year's pickup in economic growth has been notable, investors and analysts say, because of its breadth and synchronization across regions. All 45 countries tracked by the Organization for Economic Cooperation and Development are on track to post economic growth this year -- a feat last accomplished in 2007.

The gains, spreading from the U.S. to Germany to areas that had been laggards in recent years, such as Greece and Brazil, have been a boon to multinational firms, which have noted increased demand for their products this earnings season.

Shares of Dow component 3M Company, the maker of products including Post-it Notes, Scotch tape and ACE bandages, have risen 29% this year as the firm's sales have grown across the Americas, the EMEA region and Asia. Industrial giant Caterpillar Inc., another member of the Dow, has jumped 47%, buoyed by rising demand globally for bulldozers, excavators and other heavy machinery.

"We're seeing broad-based sales increases across a number of industries in all regions," said Jim Umpleby, chief executive of Caterpillar, on the company's third-quarter earnings call Oct. 24.

As of Monday, S&P 500 companies that receive more than half of their revenue from overseas were posting earnings growth of 13.6% in the third quarter from the year-earlier period, according to FactSet, outpacing the 4.9% earnings growth rate for domestic companies.

A weaker dollar also has helped. While the U.S. currency has pared some of its losses in recent weeks, as the passing of a budget in the Senate renewed some investors' hopes that Congress would push through corporate tax cuts, company officials have said the currency's weakness relative to its peers could boost profits by making their products cheaper for buyers outside the U.S.

The WSJ Dollar Index, a measure of the dollar against a basket of 16 other currencies, has fallen nearly 6% in 2017.

"We are seeing a bit of favorable impact on our real dollar growth from the recent dollar weakening," said Andrew Campion, chief financial officer at Nike Inc., on an earnings call in September.

Some still question how much longer the dollar's weakness can last.

The currency has crept higher in recent sessions, something analysts and investors attribute in part to a recent run of upbeat U.S. data that could bolster the case for the Federal Reserve to tighten monetary policy, and signs of progress on Republicans' tax overhaul.

"I'm still astounded as to how the dollar has behaved this year," said James Athey, senior investment manager at Aberdeen Standard Investments, which has around $758 billion in assets under management. With the Fed signaling it remains on track to keep raising interest rates, and U.S. economic data largely solid as of late, the currency looks "very cheap" relative to its peers, Mr. Athey said.

Some investors remain anxious about what could go wrong for a stock rally that has sent the Dow industrials to 54 record closes this year. An escalation of tensions between the U.S. and North Korea pressured stocks earlier this year. The U.S. also is in negotiations with Canada and Mexico over renewing the North American Free Trade Agreement -- something Mr. Trump has called a "disaster" and a U.S. job killer. Withdrawal from Nafta could hurt the share prices of export-reliant multinationals and crimp economic growth, some analysts said.

Yet many investors believe stocks should continue to grind higher if economic growth remains on its current course.

Forty-eight percent of investors are expecting above-trend growth and below-trend inflation over the next 12 months, according to Bank of AmericaMerrill Lynch's October fund manager survey. That marks the highest reading in the survey's history.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

October 31, 2017 05:44 ET (09:44 GMT)