Artificial intelligence is giving tech investors a whole new reason to pay attention to the Federal Reserve.
For years, giant tech companies with large balance sheets have been able to avoid rising interest rates, which tend to fall more heavily on smaller, less profitable peers.
But the once cash cow has depleted its reserves and is using debt to fund ambitious data center expansions. This leaves the group more exposed to borrowing costs.
“Technology investors are not very used to looking at interest rates,” Peter Boockvar, chief investment officer at One Point BFG Wealth Partners, said in an interview. “Suddenly, tech investors need to listen to Kevin Warsh and start paying attention to what the inflation numbers are and how the Treasury market reacts to it.”
Warsh held his first press conference as Fed chairman on Wednesday. The central bank hinted at the possibility of a rate hike in 2026, causing stock prices to fall and interest rates to rise. The yield on 10-year bonds is hovering around 4.45%.
Rising interest rates have always had a huge impact on small technology companies because investors value companies based on future earnings. When yields soar and the so-called “risk-free rate” rises, investors discount future cash flows, reducing the value of current cash flows.
The effects of rising interest rates are now being felt upstream. That’s because the tech industry’s hyperscalers are in a high-speed race to build AI infrastructure. Amazon, alphabet, microsoft and meta A total of $750 billion is expected to be deployed this year, an increase of more than 80% from 2025.
Sunday, May 31, 2026, Amazon Web Services IAD10 data center in Sterling, Virginia, USA. NextEra Energy Inc.
Lexi Critchett Bloomberg | Getty Images
Much of that expansion has been financed by debt, which will become harder to sell if interest rates rise. Nvidia, oracleAmazon, Alphabet, and Meta each have their sights set on a bond market worth tens of billions of dollars.
OpenAI CFO Sarah Friar cited the company’s ability to tap the bond market as one of the motivations for going public. Reuters reported on Thursday, citing two people familiar with the matter, citing bank officials. space xlisted on the Nasdaq last week and is preparing to meet with investors on a bond issue of at least $20 billion.
“It’s undervalued,” said Jeff Kilberg, CEO of KKM Financial, adding that there is “insatiable demand” for AI-related capital. “Technology leaders are embracing debt. This is the perfect recipe for AI people who feel secure about what they want to borrow and what they want to spend.”
Decrease in free cash flow
Some of the big tech companies are in need of cash, having spent years building up their cash reserves. goldman sachs We recently pointed out that capital spending as a percentage of cash flow is at its highest level since the dot-com era. The company also expects capital spending to be nearly $920 billion this year, calling all analyst forecasts over the past three years “too conservative.”
Amazon expects to spend about $200 billion this year, but its free cash flow is widely expected to be negative.
“Technology investors are learning what it’s like to be an investor in capital-intensive, old-economy industrial businesses,” Boockvar said. “Free cash flow is volatile and access to both bond and equity markets is essential to finance everything.”
Issuing bonds may be a deliberate strategy. Maintain liquidity for acquisitions while providing flexibility in financing long-term expansion.
Jay Woods, chief market strategist at Freedom Capital Markets, assesses debt risk based on individual companies rather than entire sectors. For example, NVIDIA is cash-strength, with free cash flow of more than $48.5 billion in the latest quarter, up from $26.1 billion a year earlier.
“They still have a deep cash bench, so I don’t think it’s that big of a red flag,” Woods said of Nvidia. “It gives them flexibility.”
–CNBC’s Drew Troast contributed reporting.
