Artificial intelligence is giving tech investors an entirely new reason to pay attention to the Federal Reserve.
For years, megacap tech companies with hefty balance sheets have been able to shrug off rising rates, which tend to weigh more heavily on smaller, less-profitable peers.
But companies that were once cash cows are depleting reserves and leveraging debt in their ambitious data center buildouts. That’s making the group much more exposed to the cost of borrowing.
“Tech investors are not as used to looking at rates,” Peter Boockvar, chief investment officer of One Point BFG Wealth Partners, said in an interview. “All of a sudden tech investors need to listen to what Kevin Warsh has to say, they need to start paying attention to what the inflation stats are and how the U.S. Treasury market responds to it.”
Warsh held his first press conference as Fed chairman on Wednesday. The central bank indicated the possibility of a rate hike in 2026, which sparked a sell-off in equities and an increase in rates. The 10-year yield is trading near 4.45%.
Higher rates have always had an outsized impact on smaller tech companies, as investors value them based on future profits. When yields spike and the so-called “risk-free rate” rises, investors discount future cash flows, making them worth less today.
The effect of rising rates is now moving upstream. That’s because tech’s hyperscalers are engaged in a high-speed race to build out AI infrastructure, with Amazon, Alphabet, Microsoft and Meta projected to deploy a combined $750 billion this year, up more than 80% from 2025.
The Amazon Web Services IAD10 data center in Sterling, Virginia, US, on Sunday, May 31, 2026. NextEra Energy Inc. agreed to pay about $67 billion in
Lexi Critchett | Bloomberg | Getty Images
A big piece of that expansion is being funded by debt, which becomes a more difficult sell if rates are rising. Nvidia, Oracle, Amazon, Alphabet and Meta are turning to the debt market to the tune of tens of billions of dollars each.
OpenAI CFO Sarah Friar has pointed to an ability to leverage debt markets as one motivation to go public. Reuters reported on Thursday, citing two sources familiar with the matter, that bankers for SpaceX, which debuted on the Nasdaq last week, are preparing to meet investors about a bond offering of at least $20 billion.
“It’s underappreciated,” said Jeff Kilburg, CEO of KKM Financial, adding that there’s an “insatiable demand” for AI-related funding. “Tech leadership is embracing debt. It’s the perfect recipe for these AI folks who feel comfortable in what they want to borrow, and spend.”
Dwindling free cash flow
Tech giants need the money as some of them deplete their cash reserves they’ve spent years building up. Goldman Sachs recently noted that capex as a percentage of cash flow is at the highest level since the dot-com era. The firm also expects that capex this year will be closer to $920 billion, and says analyst estimates have been “too conservative” each of the past three years.
Amazon, which has forecast spending of roughly $200 billion this year, is widely expected to see negative free cash flow.
“Tech investors are learning what it’s like to be an investor in old-economy industrial businesses that are capital intensive,” Boockvar said. “Free cash flow is volatile and access to both debt and equity markets are crucial in order to finance it all.”
Issuing debt can be a deliberate strategy. It can preserve liquidity for acquisitions while bringing flexibility when it comes to financing long-term buildouts.
Jay Woods, chief market strategist at Freedom Capital Markets, is assessing the debt risk based on each individual company, not the sector as a whole. Nvidia, for example, is in a strong cash position, with free cash flow jumping past $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 about Nvidia. “It does give them flexibility.”
— CNBC’S Drew Troast contributed reporting.
