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Disappointing tech earnings and Fed hike bets weigh on Dow Jones futures
- Disappointing earnings and forecasts from Amazon, Intel and Alphabet weigh on broader market sentiment, sending US index futures lower.
- At 3.4%, third-quarter GDP growth exceeded forecasts, supported by sustained consumer spending and investment in AI.
- Markets put the probability of a December rate rise at 75% after the Federal Reserve left interest rates unchanged.
A 0.05% decline leaves Dow Jones futures trading at around 52,490, while S&P 500 futures are down 0.90% at roughly 7,680 and Nasdaq 100 futures have shed over 2% to approach 28,960.
Earnings shortfalls at leading technology companies have prompted a sharp retreat in US stock futures, undermining market confidence. Amazon is trading over 7% lower before the market opens, having missed earnings and revenue forecasts and announced a substantial rise in capital expenditure to meet growing demand for AI services. A subdued outlook for the coming quarter sent Intel down nearly 23%; the company cited weakening PC demand. Even better-than-expected revenue and earnings were insufficient to prevent SanDisk from losing nearly 4%.
Thursday’s regular session had already ended lower before the latest pre-market selling. The technology-heavy Nasdaq Composite lost 1.38%, compared with declines of 0.25% for the Dow Jones Industrial Average and 0.3% for the S&P 500. Following weaker search and advertising revenue, Google parent Alphabet tumbled 12.6%. The results heightened investors’ concerns that AI could disrupt its core business.
Annualised US GDP growth of 3.4% in the third quarter pointed to continued resilience across the wider economy, exceeding the 3.2% market forecast. Steady household spending and substantial investment in AI infrastructure accounted for much of the expansion. Against this economic backdrop, markets still expect additional monetary tightening. The CME FedWatch Tool shows traders assigning roughly a 75% chance to a 25-basis-point interest rate rise in December, slightly below the previous day’s 84.2%.
AI stocks: key questions explained
As an academic discipline, artificial intelligence aims to reproduce human cognitive functions in machines, including logical understanding, perception and pattern recognition. Usually 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 tackling arbitrary problems without having been trained specifically to solve them.
Artificial intelligence has a wide range of practical uses. Among the most familiar are generative AI platforms, including ChatGPT and Google’s Bard, which draw on training involving large language models (LLMs) to respond to text-based questions. With Midjourney, users supply text prompts from which the program produces original images. Elsewhere, probabilistic techniques allow AI to assess an entity’s characteristics or how it is perceived. Upstart’s lending platform, for example, employs an AI-enhanced credit rating system to assess applicants’ creditworthiness, searching the internet for information about their careers, wealth profiles and relationships. Scientific research provides another application: some AI systems draw on large databases of studies to propose potential new pharmaceuticals for laboratory testing. By gathering and organising information about users’ viewing habits, YouTube, Spotify, Facebook and other content aggregators also use AI to recommend personalised content.
Semiconductor group Nvidia (NVDA) produces AI-focused computer chips alongside some of the platforms engineers use to develop AI applications. Because it supplies the tools for further AI development, many supporters regard Nvidia as a picks-and-shovels investment in the AI revolution. For “big data” analytics company Palantir Technologies (PLTR), large contracts with the US intelligence community are a central part of its business. Those agencies use its Gotham platform to examine data, identify intelligence leads and support pattern recognition. Major corporations, meanwhile, use Palantir’s Foundry product to monitor employee and customer information for predictive analytics and anomaly detection. Microsoft (MSFT) holds a substantial stake in OpenAI, the privately held creator of ChatGPT, and has incorporated OpenAI’s technology into its Bing search engine.
The public launch of ChatGPT in late 2022 sparked gains across many AI-related shares. Over the six months after its release, Nvidia rose well over 200%, for example. That rally quickly prompted Wall Street commentators to question whether another technology bubble was taking hold. Renowned investor Stanley Druckenmiller, whose investments have included substantial holdings in Palantir and Nvidia, argued that bubbles never run for only six months. Were enthusiasm for AI to turn into a bubble, he said, 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 had not entered a bubble, at least for the time being. Although Nvidia was then valued at 27 times forward sales, analysts expected exceptionally strong revenue growth for years ahead. By comparison, the NASDAQ 100 stood at 25 times earnings in mid-2023, versus 60 times earnings at the peak of the DotCom bubble.
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