Democrats sweep Congress, yet Dow Jones futures advance

Dip-buying lifts US stock futures after Democrats secure both the Senate and the House.
Fears of tougher AI regulation and corporate scrutiny under Democratic control weigh on tech hyperscalers in premarket trading.
Washington's pending decisions on the US-Israeli war on Iran keep the broader market cautious.

0.4% is the gain in Dow Jones futures during Wednesday's European session. The contracts trade around 52,100. S&P 500 futures are up 0.15% at around 7,610, while Nasdaq 100 futures add 0.14% to reach around 28,340.

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Dip-buyers helped US stock futures recover from an initial decline as investors assessed the implications of the Democrats' midterm election sweep of Congress. Futures recouped early losses before moving higher. Democratic control of both the Senate and the House has increased expectations of tougher regulatory scrutiny. However, investors also see the result as constraining the scope for additional tax cuts and government spending.

Tougher AI rules and wider corporate oversight remain key concerns under Democratic control. That caution was evident in premarket declines across hyperscale technology groups, including Nvidia, Apple, Microsoft, Alphabet, Amazon, and Meta.

Beyond the shift in Congress, another headwind for US index futures is Washington's imminent decision on the US-Israeli war on Iran. The decision follows closely after the political change, keeping the broader market on a cautious footing.

Nasdaq under pressure from Democrats' AI oversight plans

Policy worries, rather than purely technical factors, explain the tech-heavy Nasdaq's initial weakness after the Democratic sweep, according to analysts at Rabobank. As they observe, “Democrat candidates repeatedly spoke about more governance on AI developers in the run-up to the elections,” so “the initial pressure on Nasdaq futures from a Democrat sweep” was a logical response as investors reconsidered the sector's regulatory outlook.

AI stocks: key questions

Artificial intelligence: what does it mean?

As an academic discipline, artificial intelligence aims to reproduce human cognitive functions, logical understanding, perception and pattern recognition in machines. Commonly shortened to AI, the field encompasses artificial neural networks, machine learning or predictive analytics, symbolic reasoning, deep learning, natural language processing, speech recognition, image recognition and expert systems. Its ultimate objective is artificial general intelligence, or AGI: a machine capable of tackling arbitrary problems without having been trained to solve them.

AI applications: how is the technology used?

Artificial intelligence has a broad range of applications. Among the best known are generative AI platforms trained on large language models (LLMs) to respond to text queries, such as ChatGPT and Google’s Bard platform. For original images, Midjourney generates output from text supplied by users. Other AI systems apply probabilistic methods to assess an entity's characteristics or how it is perceived. Upstart’s lending platform, for example, uses an AI-enhanced credit rating system to assess applicants' creditworthiness, searching the internet for information about their careers, wealth profiles and relationships. Scientific research databases also support AI systems that propose potential new pharmaceuticals for laboratory testing. Meanwhile, YouTube, Spotify, Facebook and other content aggregators collect and organise viewing-habit data to deliver personalised recommendations through AI applications.

AI-related stocks: which companies are involved?

Semiconductor group Nvidia (NVDA) produces AI-focused chips as well as some of the platforms engineers use to develop AI applications. Because it supplies the tools needed for further AI development, many supporters regard Nvidia as a way to invest in the infrastructure behind the AI revolution. Another participant is Palantir Technologies (PLTR), a “big data” analytics business with substantial contracts across the US intelligence community. Those clients use its Gotham platform to analyse data, identify intelligence leads and support pattern recognition. Major corporations use its Foundry product to monitor employee and customer data for predictive analytics and anomaly detection. Microsoft (MSFT), meanwhile, holds a sizeable stake in OpenAI, the privately held creator of ChatGPT, and has incorporated OpenAI’s technology into its Bing search engine.

AI and stock valuations: is another bubble possible?

Many AI-linked shares rallied after ChatGPT became publicly available in late 2022. Over the six months after its release, Nvidia gained well over 200%, prompting Wall Street commentators to question whether another technology bubble was taking hold. Prominent investor Stanley Druckenmiller, who has held substantial positions in both Palantir and Nvidia, argued that bubbles never last just six months. If enthusiasm for AI did develop into a bubble, he said, extreme valuations would persist for at least two and a half years or longer, as they did during the DotCom bubble in the late 1990s. By the midpoint of 2023, the best assessment was that the market was not in a bubble, at least for the time being. Nvidia was indeed trading at 27 times forward sales, but analysts expected exceptionally strong revenue growth for years ahead. For comparison, the NASDAQ 100 traded at 60 times earnings at the DotCom bubble's peak, versus 25 times earnings in mid-2023.