Dow Jones futures gain as markets back tech recovery and a Fed rate hold

US index futures move higher, supported by expectations that the Fed will keep rates steady in October.
Monday’s rally in technology heavyweights and semiconductor shares helped the S&P 500 and Nasdaq recoup losses.
A packed earnings calendar on Tuesday is drawing traders’ attention, with Netflix, GM and United Airlines among the companies reporting.

Gains in Dow Jones futures reach 0.38%, taking them to around 52,380 in Tuesday’s European trading session. A rise of 0.13% puts S&P 500 futures near 7,740, whereas Nasdaq 100 futures slip 0.12% to around 29,690.

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

US stock futures found support as investors increasingly anticipated an unchanged interest-rate decision from the Federal Reserve (Fed). The CME FedWatch tool shows that Fed funds futures traders expect rates to stay at current levels at the October policy meeting. For December, however, they assign an 89.4% probability to a rate increase.

The resilience of the US economy drew an optimistic assessment from Fed Chair Kevin Warsh last week. He nevertheless stopped short of providing specific guidance on when future rate changes might occur or how likely they were.

A rebound in technology shares helped Wall Street begin the week on a mixed note. Monday’s regular US trading session saw the Dow Jones dip 0.07%, while the S&P 500 gained 0.41% and the Nasdaq Composite added 1.11%. The latter two indices recovered from the previous week’s steep sell-off, which had been fuelled by mounting worries about AI financing.

Semiconductor shares and other mega-cap names spearheaded the rebound, with gains in Micron, Nvidia, SanDisk, Amazon and Tesla. Attention is now turning to Tuesday’s heavy corporate results calendar: General Electric, Netflix, Raytheon Technologies, United Airlines and General Motors are among the companies expected to report.

How is the AI recovery lifting US yields and expectations of further Fed tightening?

The recovery in AI-related shares has also affected the bond market. According to Deutsche Bank strategists, stabilisation in these stocks “also pushed US Treasury yields higher, as it countered fears about an AI-related slowdown.” Real yields were the main driver, they explain, with “higher real yields” responsible for “the bulk of the rise in Treasury yields yesterday, rather than inflation breakevens.” Consequently, “Treasury yields saw a consistent rise across the curve, with the 2yr yield (+6.5bps) up to 4.77%, whilst the 10yr yield (+6.6bps) rose to 5.14%.” Turning to policy expectations, Deutsche Bank says “optimism on the growth side” prompted investors to have “priced in slightly more rate hikes for the months ahead,” leaving “74bps of hikes…priced in by the June 2027 meeting at the close, up +7.7bps relative to Friday.”

AI stocks: key questions answered

What does artificial intelligence mean?

At its core, artificial intelligence is an academic discipline focused on reproducing human cognitive functions, logical understanding, perception and pattern recognition in machines. Commonly known as 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 to develop artificial general intelligence, or AGI: a machine capable of solving arbitrary problems without having been trained to solve them.

How is AI used in practice?

Artificial intelligence has a wide range of applications, the best known being generative AI platforms trained on large language models (LLMs) to respond to text-based queries. ChatGPT and Google’s Bard platform are examples, while Midjourney creates original images from text supplied by users. Probabilistic techniques underpin other AI applications that assess an entity’s characteristics or perceptions of it. For example, Upstart’s lending platform applies an AI-enhanced credit rating system to assess applicants’ creditworthiness, searching the internet for information about their careers, wealth profiles and relationships. Elsewhere, AI draws on extensive databases of scientific research to propose potential new pharmaceuticals for laboratory testing. By gathering and organising information about viewing habits, YouTube, Spotify, Facebook and other content aggregators use AI applications to recommend personalised content to users.

Which stocks offer exposure to AI?

Among the companies operating in the field is semiconductor manufacturer Nvidia (NVDA), which 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 uses of artificial intelligence, many supporters regard Nvidia as a picks-and-shovels investment in the AI revolution. Another name is Palantir Technologies (PLTR), a “big data” analytics company with substantial contracts across the US intelligence community. Those agencies 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.

Could AI fuel another stock market bubble?

AI-linked shares rallied after ChatGPT became available to the public in late 2022. In the six months after its release, Nvidia, for example, climbed well over 200%, quickly prompting Wall Street commentators to question whether another technology bubble was taking hold. Renowned investor Stanley Druckenmiller, who has held sizeable positions in both Palantir and Nvidia, argued that bubbles never run for just six months. In his view, if enthusiasm for AI did turn into a bubble, extreme valuations would persist for at least two and a half years or longer, as they did during the DotCom bubble of the late 1990s. By mid-2023, the best assessment was that the market had not entered a bubble, at least at that stage. Although Nvidia then traded at 27 times forward sales, 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, against 25 times earnings in mid-2023.