Few things have dominated the stock market narrative in recent years like the Federal Reserve. The central bank effectively controls interest rates, and its decision to ramp up rates in 2022 as fast as it had in more than a generation helped fuel the 2022 bear market.
Rates have been steady for over a year now with the Fed funds rate hovering between 5.25% and 5.5%, but that is expected to change soon, almost certainly at the next Federal Reserve meeting in September.
In a speech at an economic symposium in Jackson Hole, Wyoming, Fed Chair Jerome Powell said that the "time had come" to lower interest rates as inflation was steadily cooling and the labor market had softened considerably. Lower rates should boost AI stocks. Growth stocks like ones in the AI sector typically do better in a lower-interest rate environment because lower rates make earnings in the distant future more valuable, according to the discounted cash flow model, therefore lifting valuations for growth stocks.
On that note, let's take a look at how the Fed's next rate decision could affect three of the most closely watched artificial intelligence (AI) stocks.
Image source: Getty Images.
1. Nvidia
Nvidia (NASDAQ: NVDA) has been the flagbearer for the generative AI revolution, and when it moves, the rest of the AI sector tends to follow. That's true both for company-specific news on Nvidia and macro development such as Fed announcements.
For example, Nvidia's stock price jumped on Aug. 23, the day of Powell's Jackson Hole speech, in response to increased expectations of a rate cut, gaining 4.6%. The direct impact of lower rates on Nvidia's business is likely to be negligible as the company is highly profitable and has roughly $8.5 billion in debt on its balance sheet, which isn't significant for a company of its size.
However, Nvidia would benefit in one way from lower interest rates. Lower rates are likely to encourage more spending, investment, and experimentation in AI, favoring the AI chip leader. Billions of dollars are already flowing into the new technology, of course, but lower interest rates will make it easier for start-ups to borrow money, and lower rates will make early-stage investments in AI companies more attractive for venture capitalists. Expect Nvidia shares to climb as rates fall, as it will benefit from increased spending in AI.
2. Advanced Micro Devices
Advanced Micro Devices (NASDAQ: AMD) has also staked its claim in the generative AI race with the recent launch of its Mi300 data center GPU, which helped drive data center revenue up more than 100% in the second quarter.
As a chip stock, AMD should derive a similar benefit from low interest rates as Nvidia, but there's also a kicker for AMD. The fabless chipmaker best known for its CPUs has been focused on making acquisitions to strengthen its position in AI. For example, it just made a $4.9 billion cash-and-stock acquisition of ZT Systems, a provider of AI infrastructure, one of several acquisitions the company has made recently. The week before it announced a $665 million all-cash purchase of Silo AI, the largest private AI lab.
Falling interest rates would make it easier and cheaper for AMD to borrow to make more acquisitions, which the company seems to be doing to compete with Nvidia.
3. Microsoft
Microsoft (NASDAQ: MSFT) isn't a chipmaker like Nvidia or AMD, but it also stands to benefit from lower interest rates. Cheaper borrowing costs and looser monetary policy should encourage more spending from the enterprise customers and end consumers it depends on, especially if the economy remains healthy and expanding.
Like its peers, the company's valuation should also benefit from lower interest rates as investors rotate back from bonds into stocks, investing in blue chips like Microsoft.
Microsoft's close partner OpenAI could also benefit from lower interest rates; it may need to borrow money or raise more cash from Microsoft as it's reportedly on track for a loss of $5 billion this year.
While Microsoft could fund that out of free cash flow, borrowing the money -- especially if rates fall far enough -- might make the most sense. Lower interest rates, therefore, should also help OpenAI continue to develop its breakthrough technology.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .
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