Rising Interest Rates Favor Profitable Hyperscalers Amid AI Growth Constraints

The Federal Reserve voted to raise interest rates for the first time in over three years on September 16, hiking the federal funds rate by 0.25%. This decision was unanimous and came as no surprise given the prolonged period of above-target inflation.

Fed Chairman Kevin Warsh emphasized that the main focus is now on price stability, citing the persistently high inflation rate. As a result, borrowing costs have increased, with the average 30-year mortgage interest rate reaching nearly 7%.

Morgan Stanley released a report anticipating the rate hike and advising investors to focus on AI stocks with steady cash flows and clear benefits from AI adoption, such as hyperscalers and companies using AI to boost productivity. This is because higher borrowing costs decrease access to capital for growth-intensive industries like AI.

Alphabet, parent company of Google, is well-positioned to benefit from the rising interest rates due to its significant cash reserves and high profitability. In contrast, unprofitable businesses may struggle to fund their growth commitments at higher borrowing costs.