Oracle’s announcement of the massive increase in AI-related contracts last week holds important implications for artificial intelligence spending and the tech sector.
getty
The S&P 500 reached an all-time high last Thursday but declined fractionally on Friday. The Magnificent 7, comprising Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA), outperformed with Oracle’s (ORCL) earnings further reinforcing the artificial intelligence (AI) growth narrative. Notably, banks performed well, which hints that the market is expecting a Federal Reserve (Fed) rate cut next week and a resilient economy.
Market Performance
Glenview Trust, Bloomberg
Oracle & Artificial Intelligence
All signs point to artificial intelligence as being a transformative tool for businesses and households, generating substantial economic benefits. Indications suggest that the adoption of artificial intelligence is continuing at a rapid pace.
The capital spending (capex) by AI-leaders, Alphabet, Amazon, Meta Platforms, and Microsoft, to support complex computations needed to support AI, has seen a massive rise since 2023. NVIDIA reaped significant revenue from this spending as the leading chip provider for AI. Estimates are that capital spending by these four AI leaders will exceed $400 billion by 2026. This spending has created a virtuous cycle of spending and earnings for several mega-cap technology companies, including many of the Magnificent 7, which have seen their earnings and valuations flourish.
While not included in the Magnificent 7, Oracle (ORCL) has quietly become a beneficiary of the seemingly insatiable current demand for AI training and the emerging demand for AI inferencing. Oracle’s management believes that its architecture enables better AI training at a lower cost for clients, providing a competitive edge. Additionally, their legacy database business enables Oracle’s clients to utilize their own data to offer AI inferencing, producing actionable insights, decisions, and predictions. AI inferencing is the crucial next step to AI demand and growth, since it is the use case for AI and expands the potential demand base to all corporations.
MORE FOR YOU
Last week, Oracle announced a remaining performance obligation (RPO) of $455.3 billion, which can be thought of as an order backlog or contracted revenue that hasn’t yet been fulfilled. Oracle’s RPO grew by $317.5 billion quarter-over-quarter from AI-related contracts.
Oracle (ORCL): RPO
Glenview Trust, Bloomberg
This growth in RPO stems from multi-year contracts, so this revenue will likely be realized over a roughly seven-year period. In any case, analysts’ estimates now expect Oracle’s revenue growth to accelerate from 8.4% year-over-year for fiscal 2025 to 21.9% in 2027. While the exact margins and thus profits on this new business remain unknown, the apparent demand for their services sent the stock soaring by 25.5% last week.
Oracle Annual Sales: 2026 & 2027 Estimated
Glenview Trust, Bloomberg
The supportive news from Oracle fueled the continued rally in many AI-related technology companies, with Alphabet (GOOGL), Microsoft (MSFT), and NVIDIA (NVDA) outperforming the S&P 500 handily last week.
Job Growth
The August employment report saw payrolls grow by just 22,000 nonfarm jobs, which was below expectations. Additionally, Previous data was revised slightly lower, though only by 21,000, compared to the massive downward revision last month.
Since then, on September 9, the Bureau of Labor Statistics (BLS) released preliminary revisions to payroll data, showing that 911,000 fewer jobs were created in the twelve months through March 2025 than were initially reported. This record-breaking downward revision roughly halved the job growth estimate from previous projections.
According to recent data, the four-week average of initial claims for unemployment benefits rose to near a year-to-date high.
Long-Term Initial Jobless Claims
Glenview Trust, Bloomberg
While the absolute level of initial weekly filings for unemployment benefits looks benign, the trend is moving higher. Continuing claims for benefits are also above the lows, indicating a slowdown in people being rehired after losing their jobs.
Long-Term Continuing Claims
Glenview Trust, Bloomberg
While the four-week average of initial claims for benefits is typically used to remove the volatility, the weekly claims were the highest in over three years. Consensus estimates suggest that the weekly claims will revert to roughly the four-week average level this week, as the spike last week was primarily due to filings in Texas.
Initial Jobless Claims: Weekly
Glenview Trust, Bloomberg
Federal Reserve
Following the weaker jobs data, a 25-basis-point cut at the Federal Reserve’s September 17 meeting is a virtual certainty. Fed fund futures are pricing in a 100% chance of a rate cut this week.
Expected Size Of September Rate Cut
Glenview Trust, Bloomberg
Beyond the cut this week, markets expect an additional two 25-basis-point (0.25%) Fed cuts for the remainder of 2025.
Expected Fed Rate Cuts
Glenview Trust, Bloomberg
Bottom line: The September rate cut is widely expected, so that the focus will shift to expectations for future cuts. The Fed’s release of its Summary of Economic Projections (SEP), along with Chair Powell’s comments, will be closely scrutinized for clues as to the expected pace of lower short-term rates.
What To Watch This Week
There are only five companies in the S&P 500 scheduled to report earnings, with FedEx (FDX) as the most notable for economic insights.
August retail sales are scheduled for Wednesday. The US consumer has remained resilient, which is crucial for economic growth expectations, as consumer spending is the primary driver. Expectations are for some moderation from last month’s pace, but the data will be watched for signs that tariffs or the softening job market might be weighing on spending.
Stocks are still pricing in low odds of recession, given the strong performance of banks and the more economically sensitive cyclical stocks. Further, the implied expectation is that the Fed will cut interest rates aggressively enough for this to remain a soft spot in the labor market rather than a full-fledged downturn. While there are signs of deterioration in the labor market, there remains little evidence of an impending recession, and tech spending around AI is supporting rapid earnings growth in that sector. While the Fed will almost certainly cut rates this week, the implied future pace of easing might be slower than markets would like, which could result in increased stock volatility.