AI Capex Conviction Outweighs Fed Policy Fog as Jobs Data Defies Slowdown Narrative

US nonfarm payroll employment added 115,000 jobs in April 2026—nearly double the 62,000 consensus forecast—propelling the S&P 500 and Nasdaq to fresh record highs on Friday as semiconductor stocks surged on sustained institutional conviction in AI infrastructure spending.

The Bureau of Labor Statistics report, released May 8, contradicts recent narratives of Labor Market deterioration and complicates Federal Reserve policy calculus. The unemployment rate held flat at 4.3%, while the S&P 500 closed at 7,398.93 (+0.84%) and the Nasdaq Composite climbed to 26,247.08 (+1.71%), both at all-time highs. The rally was driven by semiconductor stocks, with AMD shares surging nearly 18% in premarket trading after reporting Q1 revenue of $10.25 billion—a 38% year-over-year increase that beat consensus by $350 million.

The jobs beat arrives as markets price a ‘risk-on’ scenario underpinned by confirmation that hyperscaler AI capital expenditure will reach approximately $725 billion in 2026, according to AL Capital Advisory. Microsoft committed $190 billion, Amazon $200 billion, with Google Cloud and AWS reporting spending increases of 63% and 28% year-over-year respectively in Q1 earnings reported late April. This represents a near-doubling from the $380 billion deployed in 2024, signaling institutional conviction that AI workload demand will absorb every available unit of compute capacity.

Semiconductor Rally Reflects Multi-Year Infrastructure Cycle

AMD’s blowout quarter—which delivered earnings per share of $1.37 versus $1.29 consensus—triggered a broader semiconductor rally. The company’s market capitalization crossed $700 billion, with shares up 20% week-to-date and nearly 90% over the past month, per CNBC. The Philadelphia Semiconductor Index has soared 65% since the start of 2026 and now represents 22% of S&P 500 market capitalisation, up from 18% in October 2022.

TSMC reported a 40% year-over-year revenue increase in Q1, driven primarily by AI demand. The foundry announced its 2-nanometer chip capacity will grow at a 70% compound annual rate through 2028, with five fabrication plants beginning volume production this year, according to Investing.com. IDC forecasts the semiconductor market will grow 64% in 2026 to $1.32 trillion, with the ‘intelligent’ datacenter segment—comprising CPUs, AI accelerators, GPUs, and custom ASICs—reaching $281 billion.

The IDC forecast underscores a structural demand shift that extends beyond typical cyclical patterns. S&P 500 companies posted a blended net profit margin of 13.4% in Q1—a new record—with the Information Technology sector achieving a 29.1% net margin, up from 25.4% year-over-year, per Crestwood Advisors. The forward 12-month price-to-earnings ratio for the S&P 500 stood at 20.9 by late April, above both the five-year average of 19.9 and ten-year average of 18.9.

Fed Policy Tension: Growth Resilience vs. Inflation Persistence

The robust jobs data creates a policy dilemma for the Federal Reserve. At its April 29 meeting, the central bank held rates at 3.50%–3.75% in an 8-4 vote—the most hawkish dissent pattern since October 1992—while stating that inflation remains elevated and Middle East developments contribute to high uncertainty, according to the Federal Reserve. The dot plot projected just one 25-basis-point rate cut in 2026, with unemployment forecast to end the year at 4.4%.

Jonathan Cohn, head of US rates desk strategy at Nomura, told Reuters: “Even without the uncertainty from Iran, one could make the case that the economy doesn’t require meaningful easing at this point.” Michael Feroli, chief US economist at J.P. Morgan, noted in J.P. Morgan Global Research that “lingering concerns about downside risks to employment have led some Fed officials to keep clear of rate hike discussions” despite elevated inflation.

Oil prices remained volatile, with Brent crude falling 1% to $100.06 per barrel and WTI settling at $94.81 as markets awaited Iran’s response to a US deal proposal on reopening the Strait of Hormuz, which has been closed for 2.5 months. The closure disrupted global oil supplies and pushed Brent from $80 in February to peaks near $120 before recent retreat.

Valuation Expansion Bets on Durable Capex Cycle

The market’s willingness to absorb elevated valuations reflects a conviction that AI infrastructure spending will prove durable rather than speculative. Chris Zaccarelli, chief investment officer at Northlight Asset Management, told TheStreet: “The economy is so much better than what the doom crew has been saying. There are a lot of headwinds—higher oil prices, sticky inflation and higher-for-longer interest rates—and yet the labor market is adding jobs, GDP is growing and corporate profits are expanding at a rapid pace.”

The semiconductor rally gained additional momentum from BNN Bloomberg reporting that analyst commentary on demand sustainability has shifted from cautious to constructive. The Philadelphia Semiconductor Index’s 65% year-to-date gain represents the strongest first-four-months performance since the sector’s inception in 1993.

What to Watch

The May jobs report, due June 5, will test whether April’s strength reflects a durable trend or a temporary aberration. Any revision to April’s headline figure could shift Fed policy expectations, particularly if combined with softer wage growth data. Energy markets remain the wildcard—a breakdown in Iran ceasefire negotiations would push Brent back toward $120, intensifying stagflation risks that could override AI infrastructure optimism.

Semiconductor valuations are now pricing in sustained hyperscaler spending through 2027. A slowdown in capex guidance from Microsoft or Amazon in their next quarterly reports would trigger a sector-wide reassessment. Conversely, further capacity announcements from TSMC or Samsung would validate the multi-year infrastructure cycle thesis. The June FOMC meeting will clarify whether the Fed views labour market strength as evidence of durable growth or a reason to maintain restrictive policy longer than markets currently anticipate.