Dow Jones futures advance despite Democrats’ sweep of Congress

Dip-buying lifts US stock futures after Democrats secure control of both the Senate and the House.
Fears of tougher AI regulation and corporate scrutiny under Democratic control weigh on tech hyperscalers in premarket trading.
Caution continues to weigh on the broader market as Washington prepares to take decisions on the US-Israeli war on Iran.

US equity futures trade higher during Wednesday's European session, with Dow Jones futures up 0.4% at around 52,100. Gains of 0.15% put S&P 500 futures near 7,610, while Nasdaq 100 futures climb 0.14% to around 28,340.

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

Dip-buying helped US stock futures recover from their initial decline as investors assessed what the Democrats' midterm sweep of Congress meant for markets. Futures recouped early losses as buyers returned at lower levels. Democratic control of both the Senate and the House has fuelled expectations of closer regulatory scrutiny. At the same time, market participants see the outcome as a constraint on additional tax cuts and government spending.

The prospect of tougher AI rules and wider corporate oversight under Democratic control remains a concern. This cautious sentiment was evident in premarket declines across hyperscale technology companies, including Nvidia, Apple, Microsoft, Alphabet, Amazon, and Meta.

Broader market caution is also putting pressure on US index futures as investors await Washington's forthcoming decision on the US-Israeli war on Iran, closely following the change in the balance of power in Congress.

Why is tighter AI oversight under Democrats weighing on Nasdaq?

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 point out, “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: frequently asked questions

How is artificial intelligence defined?

At its core, artificial intelligence is an academic field focused on reproducing human cognition, logical understanding, perception and pattern recognition in machines. Commonly known as AI, it encompasses several branches: artificial neural networks, machine learning or predictive analytics, symbolic reasoning, deep learning, natural language processing, speech recognition, image recognition and expert systems. The field's ultimate objective is artificial general intelligence, or AGI: a machine capable of solving arbitrary problems without having been trained specifically to solve them.

Where is AI being used?

Artificial intelligence has a wide range of applications, with generative AI platforms among the best known. Trained on large language models (LLMs), platforms such as ChatGPT and Google’s Bard platform respond to text-based queries. User-written text also serves as the basis for original images generated by the program Midjourney. Some AI systems apply probabilistic methods to assess an entity's characteristics or how it is perceived. For example, Upstart’s lending platform evaluates applicants' creditworthiness through an AI-enhanced credit rating system that searches the internet for information on their careers, wealth profiles and relationships. Elsewhere, AI draws on extensive databases of scientific research to propose potential new pharmaceuticals for laboratory testing. To recommend personalised content, YouTube, Spotify, Facebook and other content aggregators collect and organise information about users' viewing habits through AI applications.

Which stocks offer exposure to the AI sector?

Among companies operating in AI, semiconductor manufacturer 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 required for further applications of artificial intelligence, many supporters regard Nvidia as a pick-and-shovel investment in the AI revolution. Another participant is Palantir Technologies (PLTR), a “big data” analytics business with substantial contracts across the US intelligence community. Its Gotham platform helps that community sift through 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, owns a sizeable stake in OpenAI, the privately held creator of ChatGPT, and has incorporated OpenAI’s technology into its Bing search engine.

Could AI fuel another stock market bubble?

AI-linked shares rallied after ChatGPT became available to the public in late 2022. Over the six months after its release, Nvidia, for example, rose well over 200%, prompting Wall Street commentators to question whether another technology bubble was taking hold. Renowned investor Stanley Druckenmiller, whose major investments have included both Palantir and Nvidia, argued that bubbles never run for just six months. In his view, if enthusiasm for AI did develop into a bubble, 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. Although Nvidia was then valued at 27 times forward sales, analysts expected exceptionally strong revenue growth for years ahead. A comparison with the DotCom peak shows the NASDAQ 100 trading at 60 times earnings then, against 25 times earnings in mid-2023.