How the AI Supercycle and a Pivoting Fed Are Supporting the Stock Market
The market has been jolted by Oracle's (ORCL) recent earnings guidance, which projects a growth trajectory in its cloud infrastructure business that can only be described as explosive. The analyst community and investors are recalibrating expectations based on figures that suggest the artificial intelligence infrastructure build-out is not only continuing but accelerating at a breathtaking pace. This micro-level catalyst, combined with a shifting macroeconomic landscape, presents a compelling outlook for the market.
Oracle's projects its cloud infrastructure revenue will surge by 77% in the current fiscal year, from $10 billion to $18 billion. The forward-looking numbers are even more striking:
- Fiscal 2027: $32 billion
- Fiscal 2028: $73 billion
- Fiscal 2029: $114 billion
- Fiscal 2030: $144 billion
This projected tenfold increase over the next five years is underpinned by massive new contracts. CEO Safra Catz confirmed the signing of four multi-billion dollar deals last quarter, including a landmark agreement with OpenAI to develop 4.5 gigawatts of data center capacity. This influx of business caused Oracle’s Remaining Performance Obligations (RPO)—a measure of contracted but not yet recognized revenue—to soar by an astonishing 359% year-over-year to $455 billion.
However, an interesting angle was posited by D.A. Davidson analyst Gil Luria. He suggested that this monumental demand is not entirely organic but is driven by the major hyperscalers—Microsoft, Google, and Amazon—offloading their own capacity requirements to third-party providers like Oracle. If this hypothesis is correct, it represents a calculated risk-mitigation strategy by the cloud giants. Faced with unprecedented and lumpy demand for AI compute, they are choosing to lease infrastructure to avoid the immense and risky capital expenditures associated with building out their own data centers at this frantic pace. Oracle, therefore, becomes a primary beneficiary of the industry's collective growth and risk management.
Further up the supply chain, Taiwan Semiconductor Manufacturing Co. (TSMC) reported a 34% climb in August sales. As the world's leading manufacturer of advanced semiconductors, TSMC's results are a real-time barometer of global technology demand. This robust performance provides direct corroboration that the appetite for the specialized chips powering the AI revolution remains exceptionally strong.
The Macroeconomic Crosswinds
Simultaneously, the market is interpreting a softening U.S. labor market. Recent data, including weak Non-Farm Payrolls and significant downward revisions to previous months' job gains, have solidified expectations that the Federal Reserve will proceed with interest rate cuts. The current market consensus views this as a net positive, providing a monetary tailwind for financial assets.
The prevailing narrative is one of a controlled cooling: companies are slowing hiring rather than initiating mass layoffs. This is reflected in the divergence between relatively stable initial jobless claims and a rising trend in continuing jobless claims. This dynamic suggests that while new layoffs are not accelerating, those who do lose their jobs are taking longer to find new ones—a classic sign of a softening, but not collapsing, labor market.
Synthesis and Forward Outlook
We are currently witnessing the confluence of two powerful, positive market drivers and one key uncertainty.
- AI Supercycle (+): The AI investment thesis is demonstrably powerful. Oracle's forward-looking guidance and TSMC's current sales data confirm that the demand for computational power is immense and structural. The potential for hyperscalers to use Oracle as an offload valve adds another layer to this secular growth story.
- Monetary Easing (+): The softening labor market provides the Federal Reserve with the justification to pivot towards a more accommodative monetary policy, which is historically supportive of equity valuations.
The primary unknown variable remains inflation. While the labor market is cooling, inflation has proven persistent. The upcoming August Consumer Price Index (CPI) report will be a critical data point that could either validate or challenge the market's bullish positioning.
The principal risk to this constructive outlook is the potential for the "softening labor market" to deteriorate into a "growth scare." Should hiring freezes turn into significant layoffs, the market narrative would quickly shift from anticipating beneficial rate cuts to pricing in a recession. At present, the data does not support this bearish turn, but it remains the most critical variable for investors to monitor.