Semiconductors gain 3.4% as payrolls lift Fed hike odds to 58%

The S&P 500 fell 0.38% Friday after payrolls surged to 162,000, yet the Philadelphia Semiconductor Index climbed 3.4% as money rotated into AI hardware.

"Semiconductor strength had zero relationship to the jobs number — it is the ongoing rotation between chips and software," Thomas Martin, senior portfolio manager at Globalt Investments, said.

The Dow Jones Industrial Average slipped 0.51% and the Nasdaq Composite lost 0.29%, ending a two-session winning streak, while the iShares Expanded Tech-Software ETF dropped about 2.4%. SanDisk jumped nearly 12%, the biggest gainer in the S&P 500, with SK Hynix up 8.1%, Seagate Technology 6.3%, Micron Technology 6.1% and Western Digital 5.9%. KLA and Marvell Technology each rose more than 7%, AMD 4.7%, Intel 4.5% and Applied Materials 4.3%.

The divergence followed a Labor Department report showing nonfarm payrolls rose 162,000 in August, nearly triple the 56,000 consensus, with July revised to a 21,000 gain from a 23,000 drop. The unemployment rate held at 4.1%, the labor force participation rate rose to 61.6% from 61.4%, and average hourly earnings climbed 3.1% from a year earlier. Traders lifted the odds of a quarter-point Federal Reserve hike at the Sept. 15-16 meeting to about 58%, from 49.4% before the release, and the two-year Treasury yield climbed to roughly 4.37%. The dollar strengthened against a basket of currencies, while gold swung both ways as investors weighed rate expectations against geopolitical risk. Rising yields pushed the 30-year fixed mortgage rate to a more than one-year high of 6.71% this week, according to Freddie Mac.

Storage and optical names lead the rotation

The rally concentrated in direct beneficiaries of hyperscaler capital spending. SanDisk's surge reflected an "AI storage supercycle" narrative, with DRAM and NAND prices up more than 200% and new supply not expected until around 2028, according to TechInsights' Dan Kim, cited by the Financial Times. Micron, up about 6% to near $1,000, still trades roughly 20% below its June high, leaving room for the rotation to extend. Optical communications stocks also climbed — Coherent rose 6.6%, Corning 5.7% and Lumentum 4% — after Deutsche Bank said AI investment is shifting from compute toward connectivity and networking, naming Lumentum and Coherent top picks.

Nvidia added 0.8% on Friday but has gained about 6% over three sessions after partner Dell raised its full-year guidance. The release of OpenAI's GPT-6 Astra and infrastructure plans from Microsoft, Oracle, CoreWeave, AMD and Broadcom reinforced the demand outlook. Reuters said the semiconductor group was among the day's clearest winners, with the share of industries reporting job growth climbing to 55.6%, the highest since December 2024.

The test ahead: rates versus capex

For AI hardware, the real test is not a single payrolls print but whether sustained high rates eventually reach corporate capital budgets. Software names, by contrast, face the added question of whether AI will disrupt their own business models, which is why the rotation has favored suppliers with direct order growth. If the economy stays strong and AI investment keeps expanding, hardware makers could prove relative winners in a "strong economy, high rates" environment. If rising financing costs begin to curb data-center spending, the group faces a valuation and demand reckoning. Next week's August consumer price index will help determine whether the Fed actually hikes.

This article is for informational purposes only and does not constitute investment advice.