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Dow Jones futures advance despite Democratic sweep of Congress
- A Democratic sweep of the Senate and House prompted dip-buying, lifting US stock futures.
- Fears of tighter AI regulation and corporate scrutiny under Democratic control weighed on tech hyperscalers in pre-market trading.
- With Washington due to make decisions on the US-Israeli war on Iran, caution continues to temper the broader market.
A 0.4% rise takes Dow Jones futures to around 52,100 in Wednesday’s European trading session. Gains elsewhere are more modest, with S&P 500 futures up 0.15% at around 7,610 and Nasdaq 100 futures 0.14% higher at around 28,340.
The Democrats’ midterm election sweep of Congress initially sent US stock futures lower, before dip-buyers helped them recover early losses and move higher. Investors are weighing the implications of Democratic control of both the Senate and the House: although the result heightens expectations of tougher regulatory scrutiny, it is also seen as restricting the scope for additional tax cuts and government spending.
The prospect of tighter AI rules and broader corporate oversight under the Democrats remains a central concern. That caution was evident in pre-market declines across hyperscale technology groups, with Nvidia, Apple, Microsoft, Alphabet, Amazon, and Meta all trading lower.
A further headwind for US index futures comes from the broader market’s cautious stance ahead of Washington’s forthcoming decision on the US-Israeli war on Iran, which follows closely after the change in control of Congress.
Nasdaq Comes Under Pressure as Democrats Signal Tighter AI Scrutiny
Policy worries, rather than purely technical factors, explain the technology-heavy Nasdaq’s initial weakness after the Democratic sweep, according to analysts at Rabobank. As they observe, “Democrat candidates repeatedly spoke about more governance on AI developers in the run-up to the elections,” so “the initial pressure on Nasdaq futures from a Democrat sweep” was a logical response as investors reappraised the sector’s regulatory outlook.
AI stocks: common questions answered
As an academic discipline, artificial intelligence aims to reproduce human cognitive functions, logical understanding, perception and pattern recognition in machines. The field, commonly shortened to AI, 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 tackle them.
Artificial intelligence has a wide range of applications, the best known being generative AI platforms trained on large language models (LLMs) to respond to text-based queries. ChatGPT and Google’s Bard platform are examples, while Midjourney creates original images from text supplied by users. Probabilistic techniques underpin other forms of AI, allowing them 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. Elsewhere, AI draws on extensive databases of scientific studies to propose potential new pharmaceuticals for laboratory testing. By gathering and organising information on viewing habits, YouTube, Spotify, Facebook and other content aggregators also use AI applications to recommend personalised content.
Semiconductor group Nvidia (NVDA) produces AI-focused computer chips as well as some of the platforms engineers use to develop AI applications. Because it supplies the tools needed for further uses of artificial intelligence, many supporters regard Nvidia as a picks-and-shovels investment in the AI revolution. In “big data” analytics, Palantir Technologies (PLTR) holds sizeable contracts with the US intelligence community. Its Gotham platform helps that community sift through information, identify intelligence leads and recognise patterns. Major corporations use another Palantir product, Foundry, to monitor employee and customer data for predictive analytics and anomaly detection. Meanwhile, Microsoft (MSFT) owns 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 in numerous AI-related shares. Over the six months after its release, Nvidia, for example, rose well over 200%, prompting immediate speculation among Wall Street commentators about another technology bubble. 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 did turn 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. By 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 were forecasting exceptionally strong revenue growth for years ahead. For comparison, the NASDAQ 100 traded at 60 times earnings at the peak of the DotCom bubble, against 25 times earnings in mid-2023.
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