Dow Jones futures gain on Fed rate hold bets and tech recovery

Expectations of an October Fed rate hold support gains in US equity index futures.
Monday’s rally in major technology stocks and chipmakers helped the S&P 500 and Nasdaq recoup losses.
Tuesday’s packed earnings calendar takes centre stage, with Netflix, GM and United Airlines among those reporting.

Dow Jones futures are up 0.38%. The contracts trade near 52,380 in Tuesday’s European session. A 0.13% rise puts S&P 500 futures around 7,740, whereas Nasdaq 100 futures are down 0.12% at nearly 29,690.

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

Growing expectations that the Federal Reserve (Fed) will hold interest rates steady supported US stock futures. The CME FedWatch tool shows that Fed funds futures traders anticipate no change at the October policy meeting. For December, they price in an 89.4% chance of a rate increase.

While expressing confidence in the resilience of the US economy last week, Fed Chair Kevin Warsh gave no specific indication of when further rate changes might come or how likely they were.

A technology rebound helped Wall Street begin the week with a mixed performance. Monday’s regular US trading session left the Dow Jones down 0.07%. By contrast, the S&P 500 gained 0.41% and the Nasdaq Composite added 1.11%. Those gains reversed some of last week’s sharp declines, which had been fuelled by mounting concerns about AI financing.

Gains in Micron, Nvidia, SanDisk, Amazon and Tesla put chipmakers and other mega-cap shares at the forefront of the rebound. Attention now turns to Tuesday’s heavy corporate results calendar. General Electric, Netflix, Raytheon Technologies, United Airlines and General Motors are among the companies due to report.

4.77% 2yr yield: AI recovery lifts US yields and Fed tightening expectations

The recovery in AI-related shares helped lift US yields, according to Deutsche Bank strategists. They say the stabilisation “also pushed US Treasury yields higher, as it countered fears about an AI-related slowdown.” Real yields were the main driver: “higher real yields” represented “the bulk of the rise in Treasury yields yesterday, rather than inflation breakevens.” The strategists report that “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%.” The policy implications also reflected “optimism on the growth side”, Deutsche Bank says. Investors “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

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: where is the technology used?

Artificial intelligence has a wide 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 queries. User-written text also provides the basis for original images produced by the Midjourney program. Other AI systems apply probabilistic methods to assess an entity’s qualities or how it is perceived. Upstart’s lending platform, for example, assesses applicants’ creditworthiness through an AI-enhanced credit rating system. It searches the internet for information on their careers, wealth profiles and relationships. Scientific research databases support another application: generating ideas for potential pharmaceuticals that can then undergo laboratory testing. By collecting and organising information about viewing habits, YouTube, Spotify, Facebook and other content aggregators use AI to recommend personalised content.

AI stocks: which companies have exposure?

Semiconductor company Nvidia (NVDA) produces AI-focused chips alongside some of the platforms engineers use to develop AI applications. Because it supplies the tools needed for further AI applications, many supporters regard Nvidia as a picks-and-shovels investment in the AI revolution. Large US intelligence community contracts are part of the business of Palantir Technologies (PLTR), a “big data” analytics company. Intelligence users employ 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. Meanwhile, Microsoft (MSFT) holds a substantial stake in OpenAI, the privately held creator of ChatGPT. OpenAI’s technology has been incorporated into Microsoft’s Bing search engine.

200% and beyond: could AI fuel another stock bubble?

Well over 200% was Nvidia’s gain in the six months after ChatGPT’s release. The chatbot’s public launch in late 2022 set off rallies across many AI-linked stocks, prompting immediate debate among Wall Street commentators about another technology bubble. Renowned investor Stanley Druckenmiller, who has held sizeable positions in both Palantir and Nvidia, argued that bubbles never last only six months. In his view, if enthusiasm for AI developed 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 mid-2023, the best assessment was that the market was not in a bubble, at least for the time being. Nvidia was indeed valued at 27 times forward sales, but analysts anticipated 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.