Dow Jones futures retreat amid Fed hike bets and disappointing tech earnings

Weaker market sentiment pushes US index futures lower following disappointing earnings and forecasts from Amazon, Intel, and Alphabet.
Supported by sustained consumer spending and AI investment, third-quarter GDP expanded by a stronger-than-expected 3.4%.
Markets assign a 75% probability to a December rate hike after the Federal Reserve left interest rates unchanged.

A 0.05% dip leaves Dow Jones futures trading near 52,490, while S&P 500 futures lose 0.90% to about 7,680 and Nasdaq 100 futures shed over 2% to roughly 28,960.

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

Sentiment took a heavy hit from disappointing results at major technology companies, sending US stock futures sharply lower. In pre-market trade, Amazon shares have lost over 7% as both earnings and revenue fell short of estimates. The company also announced a substantial rise in capital expenditure to meet growing demand for AI services. A subdued forecast for the coming quarter sent Intel down nearly 23%, with the company citing weaker PC market demand. SanDisk, by contrast, reported revenue and earnings above expectations, yet its shares still retreated nearly 4%.

Losses in pre-market trade extend the weakness seen during Thursday’s regular session. The tech-heavy Nasdaq Composite shed 1.38%, against declines of 0.25% for the Dow Jones Industrial Average and 0.3% for the S&P 500. A 12.6% plunge in Google parent Alphabet followed softer search and advertising revenues, deepening investor anxiety over possible AI-led disruption to its core business.

Financial markets continue to expect additional policy tightening against a backdrop of resilient US economic growth. Third-quarter US GDP rose at an annualised 3.4%, exceeding the market forecast of 3.2%, with steady consumer spending and substantial AI infrastructure investment providing the main impetus. The CME FedWatch Tool puts the probability traders assign to a 25-basis-point interest rate increase in December at roughly 75%, slightly below the previous day’s 84.2%.

AI stocks: key questions answered

What does artificial intelligence seek to achieve?

Reproducing human cognitive abilities in machines is the central aim of artificial intelligence, an academic discipline commonly shortened to AI. These abilities encompass logical understanding, perception and pattern recognition. Its various branches include artificial neural networks, machine learning or predictive analytics, symbolic reasoning, deep learning, natural language processing, speech recognition, image recognition and expert systems. Ultimately, the field aims to develop artificial general intelligence, or AGI: a machine capable of tackling arbitrary problems without having been trained to solve them.

How is AI used in practice?

Artificial intelligence serves a wide range of purposes, with generative AI platforms among its most familiar applications. Trained on large language models (LLMs), platforms such as ChatGPT and Google’s Bard respond to text-based questions. User-written text also provides the basis for original images produced by the program Midjourney. Elsewhere, probabilistic methods allow AI systems to assess an entity’s characteristics or how it is perceived. For example, Upstart’s lending platform assesses applicants’ creditworthiness through an AI-enhanced credit rating system that searches the internet for information about their careers, wealth profiles and relationships. Scientific research databases support other AI systems in proposing potential new pharmaceuticals for laboratory testing. Content aggregators, including YouTube, Spotify and Facebook, gather and organise information on users’ viewing habits, enabling AI applications to recommend personalised content.

Which stocks offer exposure to the AI sector?

Among companies operating in AI, semiconductor maker Nvidia (NVDA) produces both AI-oriented computer chips and some of the platforms engineers rely on to develop AI applications. By supplying the tools needed for further AI applications, Nvidia is regarded by many supporters as a picks-and-shovels investment in the AI revolution. Another company in the sector, Palantir Technologies (PLTR), specialises in “big data” analytics and holds sizeable contracts with the US intelligence community. That community uses Palantir’s Gotham platform to analyse data, identify intelligence leads and support pattern recognition. Large corporations use its Foundry product to monitor employee and customer information for predictive analytics and anomaly detection. Microsoft (MSFT), meanwhile, owns a substantial stake in OpenAI, the privately held creator of ChatGPT, and has incorporated OpenAI’s technology into its Bing search engine.

Does AI enthusiasm risk creating another stock market bubble?

A rally in numerous AI-linked stocks followed ChatGPT’s public launch in late 2022. Nvidia, for example, gained well over 200% during the six months after its release, prompting immediate debate among Wall Street commentators over whether another technology bubble was taking hold. Well-known investor Stanley Druckenmiller, whose major investments have included both Palantir and Nvidia, argued that bubbles never endure for just 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 of the late 1990s. As of mid-2023, the best assessment was that the market was not in a bubble, at least for the time being. Although Nvidia then commanded a valuation of 27 times forward sales, analysts expected exceptionally strong revenue growth over the following years. For comparison, the NASDAQ 100’s valuation stood at 25 times earnings in mid-2023, against 60 times earnings at the peak of the DotCom bubble.