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

Caution on Wall Street leaves US index futures mixed ahead of the Fed's policy decision on Wednesday.
A Fed rate pause in October remains the dominant market expectation, with an implied probability of 89.5%.
Equity markets retain underlying support from the recent advance in leading technology shares.

A mixed tone prevails in US futures during Tuesday's European trading hours, with Dow Jones futures edging up 0.05% to around 52,580. S&P 500 futures are down 0.11% at roughly 7,710, while a 0.30% fall leaves Nasdaq 100 futures near 29,350.

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

Caution ahead of Wednesday's Federal Reserve (Fed) policy announcement is keeping US stock futures mixed. Financial markets expect rates to remain unchanged at the Federal Reserve's forthcoming October meeting, with another increase potentially following in December. The CME FedWatch Tool puts the market-implied probability of an October rate pause at 89.5%, while pricing indicates an 82.3% chance of a rate hike in December.

Highlighting persistent price pressures, Navy Federal Credit Union chief economist Heather Long 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 timing of a rate increase, however, Heather said, “given that it’s right before an election,” adding, “they won’t hike in October.”

Technology shares helped Wall Street make a strong start to the week, buoyed by excitement around Anthropic’s planned IPO ahead of a packed earnings schedule and the Federal Reserve's policy meeting. Monday's regular session saw the Dow rise 0.3%, while the S&P 500 added 0.7% and the Nasdaq Composite gained 0.8%.

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

What is sustaining the chip rally as Mag 7 and ai laggards recover?

A sharp rebound across semiconductor stocks helped sustain the positive equity-market mood, according to analysts at Deutsche Bank. They point to the Philadelphia Semiconductor Index's rise of “+2.82% after falling -3.21% last week.” Gains extended to the leading technology stocks, with the analysts noting that “the Mag 7 gained +0.76%,” alongside a recovery in some recent AI-related laggards. Among them was CoreWeave, which ended “+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 answered

How is artificial intelligence defined?

At its core, artificial intelligence is an academic discipline focused on reproducing 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 to develop artificial general intelligence, or AGI: a machine capable of solving arbitrary problems without having been trained to address them.

Where is AI being applied?

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 using large language models (LLMs) to respond to text-based queries. For image creation, Midjourney generates original visuals from text supplied by users. Probabilistic techniques underpin other forms of AI, helping assess an entity's attributes or how it is perceived. Upstart’s lending platform, for instance, evaluates applicants' creditworthiness through an AI-enhanced credit rating system that searches the internet for information on their careers, wealth profiles and relationships. In pharmaceutical research, other AI systems draw on large databases of scientific studies to propose potential new drugs for laboratory testing. Content aggregators such as YouTube, Spotify and Facebook collect and organise information about users' viewing habits, using AI applications to recommend personalised content.

Which stocks offer exposure to AI?

Among the companies operating in AI is semiconductor maker Nvidia (NVDA), which produces AI-focused computer chips as well as some of the platforms engineers use to develop AI applications. Because it supplies tools for further uses of artificial intelligence, many supporters regard Nvidia as a supplier of essential infrastructure for the AI revolution. Another participant is Palantir Technologies (PLTR), a “big data” analytics business with sizeable 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 Palantir's Foundry product to monitor employee and customer data 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.

Is AI capable of fuelling another stock market bubble?

AI-linked shares rallied after ChatGPT became available to the public in late 2022. Over the six months following its release, Nvidia, for example, gained well over 200%, prompting immediate debate among Wall Street commentators about 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 only six months. In his view, if enthusiasm for AI were to develop into a bubble, extreme valuations would persist for at least two and a half years or longer, as they did during the late-1990s DotCom bubble. The best assessment at the midpoint of 2023 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 over the 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.