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

85% is the probability traders assign to unchanged rates. US index futures advance, but Chair Warsh provides no clear policy signal.
Sentiment and the technology outlook strengthen as Super Micro, Dell, and HPE post sharp pre-market advances.
Strong Q3 revenue and Tesla merger discussions lifted SpaceX sharply; slowing growth weighs on Netflix.

52,730 is roughly where Dow Jones futures are holding steady. During Wednesday’s European session, S&P 500 futures jump 0.25% to around 7,770, with Nasdaq 100 futures climbing 0.71% to approximately 29,880.

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

An 85% probability of the Federal Reserve leaving interest rates unchanged next week is indicated by the CME FedWatch Tool. US stock futures advanced as investors assessed the rate outlook. Maintaining a neutral position, Fed Chair Kevin Warsh stressed that he does not "prejudge" interest rate decisions. Markets therefore lack a clear indication of whether the central bank will increase rates or leave them unchanged at its forthcoming October policy meeting.

Strong corporate results, particularly from artificial intelligence-related shares, lifted sentiment despite uncertainty over monetary policy. After releasing robust preliminary results, Super Micro Computer rallied over 13% in pre-market trading. The move revived confidence in AI expenditure and supported shares throughout 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-on-year jump in third-quarter revenue to $14.58 billion sent SpaceX shares 8% higher. Additional support came from Elon Musk’s disclosure that special committees had been established by SpaceX and Tesla to examine a possible merger. Netflix moved in the opposite direction, losing over 5%. The streaming company reported its weakest revenue growth in three years and forecast a fourth successive quarter of slowing growth.

“Another 24 hours of uncertainty and volatility” is how analysts at Deutsche Bank characterise the period. They say markets first faced “a widespread morning sell-off dominated by AI concerns, higher oil prices and ongoing worries over French sovereign debt.” The mood changed as “the US came in,” they note. The session then “turned into a more positive” one, eventually pushing “the S&P 500 to close +0.28% higher as the index saw the most daily advancers since April.”

AI equities: key questions

Artificial intelligence: the fundamentals

As an academic discipline, artificial intelligence aims to replicate 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 solving arbitrary problems without having been trained to address them.

AI applications across industries

Artificial intelligence has a broad 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-based questions. User-written text prompts allow another programme, Midjourney, to produce original images. Probabilistic methods underpin other AI systems that 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 on their careers, wealth profiles and relationships. Elsewhere, AI draws on extensive databases of scientific studies 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 to recommend personalised content.

AI-related stocks: key companies

Semiconductor company Nvidia (NVDA) produces AI-focused computer chips alongside 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 way to invest in the infrastructure behind the AI revolution. Another company in the field is Palantir Technologies (PLTR), a “big data” analytics business with substantial contracts across the US intelligence community. Those clients use its Gotham platform to analyse 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, holds a substantial stake in OpenAI, the privately held creator of ChatGPT. OpenAI’s technology has been incorporated into Microsoft’s Bing search engine.

AI equities and the risk of another bubble

200% was comfortably exceeded by Nvidia’s gain in the six months after ChatGPT’s public launch in late 2022. Many other AI-linked shares also rallied following the release, prompting immediate debate among Wall Street commentators about another technology bubble. Prominent investor Stanley Druckenmiller, who has held sizeable investments in both Palantir and Nvidia, argued that bubbles never last only six months. If enthusiasm for AI did develop into a bubble, he said, extreme valuations would persist for at least two and a half years or longer, as in the DotCom bubble of the late 1990s. The best assessment at the midpoint of 2023 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 expected exceptionally strong revenue growth for years ahead. By comparison, the NASDAQ 100 traded at 25 times earnings in mid-2023, against 60 times earnings at the DotCom bubble’s peak.