Dow Jones futures rise as Fed rate hike fears ease ahead of big tech earnings
- US indices futures gained as traders priced in an 85.1% chance the Fed holds interest rates steady.
- Tech stocks face pressure from AI debt concerns, highlighted by CoreWeave’s 25% weekly drop.
- Markets await major corporate earnings this week, including results from Tesla, Meta, and Netflix.
Dow Jones futures gain by 0.16% to trade near 52,300 during European hours on Monday. S&P 500 futures surge 0.59% to trade around 7,750, while Nasdaq 100 futures rise by 1.15% to near 29,730.
US stock futures climbed as expectations for an October interest rate hike by the Federal Reserve (Fed) continued to decline. Speaking at an International Monetary Fund event on Friday, Fed Chairman Kevin Warsh stated that he does not prejudge monetary policy decisions, leaving markets without a clear direction ahead of the central bank's upcoming October meeting.
According to data from the CME FedWatch Tool, traders are now pricing in an 85.1% chance that the central bank will keep interest rates unchanged later this month, a substantial rise from the 42.4% probability recorded just a month ago.
Meanwhile, technology stocks came under pressure last week amid growing concerns over AI financing. CoreWeave, a neocloud company that relies heavily on debt to build data centers leased to technology firms, emerged as a focal point of these concerns, with its shares plunging 25% over the week. Corporate bond investors have also begun avoiding CoreWeave’s debt, pushing the company’s credit default swaps to distressed levels.
Against this backdrop, traders prepared for a busy week of corporate earnings while reassessing the outlook for AI-related investments. Market participants are now awaiting key quarterly results from major companies, including Tesla, Meta, Netflix, American Express, and GE Aerospace.
Dollar seen vulnerable if AI optimism fades
Analysts at MUFG/BTMU caution that the recent pattern of heavy foreign inflows into US assets linked to artificial intelligence carries a downside risk for the greenback. They argue that while AI-related enthusiasm has been a key support, “this dynamic also leaves the USD more exposed to a reversal if sentiment towards AI deteriorates.”
AI stocks FAQs
First and foremost, artificial intelligence is an academic discipline that seeks to recreate the cognitive functions, logical understanding, perceptions and pattern recognition of humans in machines. Often abbreviated as AI, artificial intelligence has a number of sub-fields including artificial neural networks, machine learning or predictive analytics, symbolic reasoning, deep learning, natural language processing, speech recognition, image recognition and expert systems. The end goal of the entire field is the creation of artificial general intelligence or AGI. This means producing a machine that can solve arbitrary problems that it has not been trained to solve.
There are a number of different use cases for artificial intelligence. The most well-known of them are generative AI platforms that use training on large language models (LLMs) to answer text-based queries. These include ChatGPT and Google’s Bard platform. Midjourney is a program that generates original images based on user-created text. Other forms of AI utilize probabilistic techniques to determine a quality or perception of an entity, like Upstart’s lending platform, which uses an AI-enhanced credit rating system to determine credit worthiness of applicants by scouring the internet for data related to their career, wealth profile and relationships. Other types of AI use large databases from scientific studies to generate new ideas for possible pharmaceuticals to be tested in laboratories. YouTube, Spotify, Facebook and other content aggregators use AI applications to suggest personalized content to users by collecting and organizing data on their viewing habits.
Nvidia (NVDA) is a semiconductor company that builds both the AI-focused computer chips and some of the platforms that AI engineers use to build their applications. Many proponents view Nvidia as the pick-and-shovel play for the AI revolution since it builds the tools needed to carry out further applications of artificial intelligence. Palantir Technologies (PLTR) is a “big data” analytics company. It has large contracts with the US intelligence community, which uses its Gotham platform to sift through data and determine intelligence leads and inform on pattern recognition. Its Foundry product is used by major corporations to track employee and customer data for use in predictive analytics and discovering anomalies. Microsoft (MSFT) has a large stake in ChatGPT creator OpenAI, the latter of which has not gone public. Microsoft has integrated OpenAI’s technology with its Bing search engine.
Following the introduction of ChatGPT to the general public in late 2022, many stocks associated with AI began to rally. Nvidia for instance advanced well over 200% in the six months following the release. Immediately, pundits on Wall Street began to wonder whether the market was being consumed by another tech bubble. Famous investor Stanley Druckenmiller, who has held major investments in both Palantir and Nvidia, said that bubbles never last just six months. He said that if the excitement over AI did become a bubble, then the extreme valuations would last at least two and a half years or long like the DotCom bubble in the late 1990s. At the midpoint of 2023, the best guess is that the market is not in a bubble, at least for now. Yes, Nvidia traded at 27 times forward sales at that time, but analysts were predicting extremely high revenue growth for years to come. At the height of the DotCom bubble, the NASDAQ 100 traded for 60 times earnings, but in mid-2023 the index traded at 25 times earnings.
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