Fed rate pause expectations and AI tech rally lift Dow Jones futures

US index futures advance with traders assigning an 85% chance to rates staying unchanged, even as Chair Warsh refrains from giving a clear policy signal.
Market sentiment and the technology outlook strengthen as Super Micro, Dell, and HPE post sharp pre-market gains.
Robust Q3 revenue and discussions over a Tesla merger sent SpaceX sharply higher, whereas weaker growth weighs on Netflix.

US index futures show gains alongside a steady Dow Jones contract during Wednesday's European session. Dow Jones futures trade near 52,730, while S&P 500 futures climb 0.25% to around 7,770 and Nasdaq 100 futures advance 0.71% to roughly 29,880.

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

Gains in US stock futures came as investors assessed the interest rate outlook. The CME FedWatch Tool put the probability of the Federal Reserve leaving rates unchanged next week at 85%. With Fed Chair Kevin Warsh retaining a neutral position and stressing that he does not "prejudge" interest rate decisions, markets have received no clear indication of whether the central bank will increase rates or leave them on hold at its forthcoming October policy meeting.

Upbeat corporate earnings, particularly among artificial intelligence-related stocks, helped improve market sentiment despite uncertainty over monetary policy. After delivering strong preliminary results, Super Micro Computer jumped over 13% in pre-market deals, reviving confidence in AI spending and supporting shares across the sector. Gains extended to hardware makers Dell Technologies and Hewlett Packard Enterprise, as well as neocloud providers CoreWeave and Nebius Group.

A 161% year-over-year jump in third-quarter revenue to $14.58 billion sent SpaceX shares 8% higher. Further support came from Elon Musk's announcement that SpaceX and Tesla had set up special committees to examine a possible merger. Netflix, by contrast, fell over 5% after reporting its weakest revenue growth in three years and forecasting a fourth successive quarter of slowing growth.

Markets experienced “another 24 hours of uncertainty and volatility,” according to Deutsche Bank analysts. They point to an initial setback from “a widespread morning sell-off dominated by AI concerns, higher oil prices and ongoing worries over French sovereign debt.” The mood subsequently improved as “the US came in,” they add. The session then “turned into a more positive” one, pushing “the S&P 500 to close +0.28% higher as the index saw the most daily advancers since April.”

AI stocks: key questions answered

What does artificial intelligence mean?

At its core, artificial intelligence is an academic field focused on reproducing human cognitive abilities, logical understanding, perception and pattern recognition in machines. Commonly shortened to AI, it encompasses several sub-fields: 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 to develop artificial general intelligence, or AGI: a machine capable of solving arbitrary problems without having been trained specifically to tackle them.

How is AI applied in practice?

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. Midjourney, meanwhile, creates original images from text supplied by users. Some AI systems apply probabilistic methods to assess an entity's characteristics or how it is perceived. For example, Upstart’s lending platform employs an AI-enhanced credit rating system to assess applicants' creditworthiness, searching the internet for information about their careers, wealth profiles and relationships. Other AI systems draw on extensive databases of scientific studies to propose potential new pharmaceuticals 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 the AI sector?

Semiconductor maker Nvidia (NVDA) produces AI-oriented computer chips as well as some of the platforms engineers use to develop AI applications. Because it supplies the tools required for further AI applications, many supporters regard Nvidia as a picks-and-shovels investment in the AI revolution. In “big data” analytics, Palantir Technologies (PLTR) holds substantial contracts with the US intelligence community. Its Gotham platform helps that community examine 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.

Is AI capable of fuelling another stock market bubble?

AI-linked shares rallied after ChatGPT became publicly available in late 2022. Over the six months after its release, Nvidia, for example, gained well over 200%, 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 last 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 in the late 1990s. At the midpoint of 2023, the best assessment was that the market was not in a bubble, at least for the time being. Although Nvidia then traded at 27 times forward sales, analysts expected exceptionally strong revenue growth for years ahead. The NASDAQ 100's valuation stood at 25 times earnings in mid-2023, compared with 60 times earnings at the peak of the DotCom bubble.