Rising interest rates threaten AI stock growth, warns Former Fed official

Recent market performance reflects this concern. Shares of CoreWeave (NASDAQ:CRWV) declined by 47.54% and Nebius Group (NASDAQ:NBIS) fell 45.4% in the month leading up to November 6th, while Microsoft (NASDAQ:MSFT) experienced a modest 0.16% increase. Investors are now scrutinizing AI companies based on their funding sources, differentiating those with cash reserves from those reliant on debt.

The pressure stems from two converging factors. The Federal Reserve increased its benchmark rate by a quarter point in September and maintained it between 3.75% and 4.00% in October. Current projections indicate a 72% probability of another quarter-point hike in December. Simultaneously, the 10-year Treasury yield reached 5.24% on October 9th and remained at 4.84% as of November 5th, contributing to increased borrowing costs. The VIX volatility index also spiked to 28.18 on November 3rd, its highest level since early August.

CoreWeave exemplifies the challenges faced by heavily indebted companies. Despite a substantial $104.2 billion revenue backlog, the company anticipates spending $35 billion to $39 billion on capital projects this year, with debt exceeding equity by a factor of 8.94. Interest expenses surged from $267 million to $640 million in the second quarter, and are projected to reach $860 million to $940 million in the third quarter.

Nebius Group, planning $20 billion to $25 billion in capital expenditures, relies on $37.5 billion in signed future revenue. The company issued $4.34 billion in convertible notes during the first half of the year. The company’s reliance on a few key customers—representing 24%, 21%, and 14% of second-quarter revenue—makes it vulnerable to potential shifts in customer demand.

Oracle (NYSE:ORCL), while boasting $664 billion in signed future revenue, spent $28.5 billion on capital projects last quarter and experienced a $5.4 billion free cash flow deficit. Interest expenses increased by 55%. When questioned about when the company would achieve positive free cash flow, CFO Hilary Maxson stated, “We have not given a particular time frame on that yet.” The stock has fallen 39.64% this year.

In contrast, Microsoft generated $18.6 billion in free cash flow last quarter, even with $45.2 billion in capital spending, and has not yet tapped into debt markets. Alphabet, however, is facing negative $9.07 billion in free cash flow after $51.36 billion in capital spending, and has recently issued $28.7 billion in new bonds.

Even companies with substantial free cash flow are not immune. Micron Technology (NASDAQ:MU) generated $62.3 billion in free cash flow in fiscal 2026, yet its stock has declined 36.57% in the last month. This is due to the fact that its high-bandwidth memory (HBM) orders are tied to companies that rely on borrowing. A tightening of lending conditions could curtail those orders, even amidst chip scarcity.

Investors should closely monitor CoreWeave’s upcoming third-quarter earnings report and the Fed’s December meeting. A rate hike could significantly increase financing costs for data center contracts initially priced with lower interest rates. While demand for AI-related services remains robust, the sustainability of the borrowing-fueled expansion at current rates remains an open question.