Dow Jones Futures rise following Wall Street’s positive start to the week

Ahead of Wednesday’s Fed decision, caution on Wall Street leaves US index futures mixed.
An 89.5% probability of an October Fed rate pause is priced into markets.
Equities retain underlying support from the recent advance in leading technology shares.

Dow Jones futures rise 0.05%. The contracts trade near 52,580 in Tuesday’s European session. S&P 500 futures are down 0.11% at around 7,710, while Nasdaq 100 futures retreat 0.30% to near 29,350.

With the Federal Reserve (Fed) set to announce its policy decision on Wednesday, caution among traders is keeping US stock futures mixed. Markets expect rates to remain unchanged at the upcoming October meeting, with another increase possible in December. The CME FedWatch Tool puts the market-implied probability of an October pause at 89.5%, compared with an 82.3% likelihood of a December rate rise.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Highlighting persistent price pressures, Heather Long, chief economist at Navy Federal Credit Union, said: “Inflation is still the No. 1 problem in the US economy, and there are a lot of signs it is getting more broad-based.” She added: “For consumers, it means really high borrowing costs for the foreseeable future.” On the October decision, however, Heather cited the timing, “given that it’s right before an election,” and added, “they won’t hike in October.”

Optimism surrounding Anthropic’s planned IPO lifted technology shares and gave Wall Street a strong start to the week. The advance came ahead of a packed earnings schedule and the Federal Reserve’s policy meeting. Monday’s regular trading session saw the Dow rise 0.3%, the S&P 500 add 0.7% and the Nasdaq Composite gain 0.8%.

Despite investors’ concerns about the substantial borrowing required to finance artificial intelligence investments, Tesla jumped more than 5% and Nvidia added 2%. Microsoft and Amazon also closed higher.

Mag 7 and ai laggards recover as chip gains continue

A sharp semiconductor rebound helped sustain positive equity sentiment, according to analysts at Deutsche Bank. They point to the Philadelphia Semiconductor Index’s move of “+2.82% after falling -3.21% last week.” Gains extended across leading technology stocks, with the analysts noting that “the Mag 7 gained +0.76%,” as several recent AI-related laggards also recovered. Among them was CoreWeave, which closed “+1.76%, despite initially falling in pre-market trading after Elon Musk wrote on X on Sunday that ‘neoclouds’ would see ‘guppy-level death and consolidation’, arguing that debt markets would be reluctant to finance companies overwhelmingly reliant on AI data centres for their revenues.”

AI stocks: key questions

How is artificial intelligence defined?

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 covers 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 solving arbitrary problems without having been trained to solve them.

Where is AI applied?

Artificial intelligence has a broad range of applications. Among the best known are generative AI platforms, including ChatGPT and Google’s Bard platform, which draw on training with large language models (LLMs) to respond to text-based queries. Users can also create original images from text prompts through the Midjourney program. Probabilistic techniques underpin other forms of AI, helping assess an entity’s qualities or how it is perceived. Upstart’s lending platform, for example, applies an AI-enhanced credit rating system to assess applicants’ creditworthiness, searching the internet for information on their careers, wealth profiles and relationships. Elsewhere, AI draws on large databases of scientific studies to propose potential new pharmaceuticals for laboratory testing. Content aggregators such as YouTube, Spotify and Facebook collect and organise viewing-habit data, using AI applications to recommend personalised content.

Which stocks offer exposure to AI?

Semiconductor company Nvidia (NVDA) produces AI-focused computer chips as well as some of the platforms engineers use to develop AI applications. Because it supplies the tools needed for further applications of artificial intelligence, many supporters regard Nvidia as a picks-and-shovels investment in the AI revolution. Another company in the field is Palantir Technologies (PLTR), a “big data” analytics business with substantial US intelligence community contracts. Its Gotham platform helps intelligence users sift through data, identify leads and recognise patterns. Major corporations use its Foundry product to monitor employee and customer data for predictive analytics and anomaly detection. Microsoft (MSFT), meanwhile, holds a substantial stake in OpenAI, the privately held creator of ChatGPT. OpenAI’s technology has been incorporated into Microsoft’s Bing search engine.

Could AI fuel a fresh stock market bubble?

The public launch of ChatGPT in late 2022 triggered gains across many AI-linked stocks. In the six months after its release, Nvidia rose well over 200%, prompting immediate debate among Wall Street commentators about whether another technology bubble was taking hold. Prominent investor Stanley Druckenmiller, who has held substantial investments in both Palantir and Nvidia, argued that bubbles never last only six months. If AI enthusiasm 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 commanded 60 times earnings at the DotCom bubble’s peak, against 25 times earnings in mid-2023.