The Fed Hiked Interest Rates for the First Time in 3 Years. Are AI Stocks in Trouble?

The U.S. Federal Reserve raised key interest rates as expected on Wednesday. Higher-than-expected inflation numbers for August pushed most analysts to suspect a rate hike was likely.

With its first rate hike since 2023, the Federal Reserve hopes to curb spending and prevent inflation from rising further. The downside is higher borrowing costs.

As CNN concludes, that's bad news "for Americans already struggling to afford homes, cars, and other big-ticket purchases." But higher borrowing costs will also disproportionately affect certain sectors of the market, with AI stocks potentially at the top of that list.

The AI industry is growing rapidly. But to sustain current growth rates, massive amounts of data center infrastructure will be needed. That infrastructure is capital-intensive, and the funds for scaling need to come from somewhere.

Major AI companies have been rushing to go public this year. SpaceX (NASDAQ:SPCX) completed its blockbuster IPO in June, raising more than $85 billion. OpenAI and Anthropic are reportedly pursuing their own IPOs.

Equity funding may indirectly ease the pain of higher interest rates, though higher key interest rates are often factored in to the overall cost of equity. Debt funding, however, will remain critical to scaling AI infrastructure. It's no wonder than SpaceX completed an upsized $25 billion bond offering the same month the company went public.

How much will higher interest rates hurt the AI sector? There are two things to keep in mind.

1. Profitable AI companies have a slight edge

In August, Morgan Stanley (NYSE:MS) presciently released a report detailing its views on how AI companies will be affected by higher rates. It's main takeaway? That investors should prioritize AI businesses with existing profits and positive cash flows.

"[T]he artificial intelligence boom is entering a more mature phase," the firm stresses. "The first stage was about excitement and possibility. The current stage is increasingly about results: what AI costs, what it earns and how quickly it can be monetized."

Profitable AI companies with existing cash flows have a lower reliance on capital markets than unprofitable firms with negative cash flows. It makes sense, then, that these businesses will be less impacted by higher interest rates.

Scaling AI infrastructure is currently akin to an arms race. The firms that scale the fastest could gain durable competitive advantages. In this regard, cash flow positive AI businesses have the upper hand as borrowing costs increase.

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2. Another rate hike could be on the way

Borrowing costs are expected to rise even further. The latest rate hike was unanimous, and most members of the Federal Open Market Committee believe at least one more interest rate hike in 2026 is warranted.

Analysts are split, however, on how far these rate hikes will go.

Dustin Reid, chief strategist at Mackenzie Investments, believes we could see "more rather than less" rate hikes in 2027. In other words, 2026 won't be the end to the rate hike cycle.

Kay Haigh of Goldman Sachs, meanwhile, stresses that the Fed "has signaled it does not at this stage envisage an aggressive tightening cycle." In other words, another rate hike could occur, but it won't mark the beginning of a long-term hike cycle.

Long term, higher rates would likely put a dent in the scale and pace of the AI data center buildout. But no matter how high rates go, AI businesses that can self-fund capital expenditures will be at a competitive advantage.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.