The Fed held interest rates at 3.75%–4.00% on Wednesday, but the decision did little to settle the debate over technology valuations.
The $Invesco QQQ Trust(QQQ)$ rose 0.60%, while the $SPDR S&P 500 ETF Trust(SPY)$ gained 0.28%. Beneath the modest index gains, individual stocks moved in different directions. $Advanced Micro Devices(AMD)$ climbed 3.24%, while $NVIDIA(NVDA)$ fell 1.17%.
That divergence highlights an important shift in the market: exposure to AI and technology alone may no longer be enough to justify a premium valuation.
1. The biggest risk may be the price investors pay, not the growth itself
Technology companies can continue growing revenue and earnings while their share prices struggle.
Why? Because stock prices reflect expectations about future performance, not just current results.
When investors pay a high earnings multiple, they are effectively expecting strong growth to continue. If interest rates remain elevated, future earnings become less valuable in today’s terms, putting pressure on valuations.
This creates a difficult combination for expensive growth stocks. Companies must deliver strong results while investors may become less willing to pay premium prices for those results.
A good business and a good investment are not always the same thing. Valuation matters.
2. AI spending needs to produce measurable returns
The AI opportunity remains significant, but the investment required to capture it is enormous.
Cloud providers are expanding data-centre capacity, semiconductor companies are developing increasingly advanced chips, and businesses are investing in the infrastructure needed to run AI workloads.
The question is how much economic value these investments ultimately create.
I would pay particular attention to three measures:
• Earnings growth: Are profits increasing alongside AI-related revenue?
• Free cash flow: Can companies generate cash after funding their capital expenditure?
• Return on invested capital: Are new investments generating sufficient returns relative to the money committed?
These measures help distinguish companies building profitable businesses from those simply spending heavily to remain competitive.
If AI demand continues to grow but the cost of serving that demand rises just as quickly, shareholders may not receive the returns they expect.
3. Why the next rate move matters
The Fed’s decision to hold rates does not guarantee that borrowing costs will decline.
Inflation remains above the central bank’s 2% target, and two officials favoured raising rates at this meeting. If inflation proves persistent, the market may need to reconsider expectations for future monetary easing.
Higher yields could place additional pressure on expensive technology stocks, particularly companies whose expected profits are concentrated far into the future.
However, the impact would not be uniform.
Established technology companies with strong balance sheets, recurring revenue and substantial free cash flow may be better positioned to withstand higher rates than businesses that depend heavily on external financing or distant future profits.
That distinction matters more than simply labelling a stock as either growth or value.
4. What would convince me that valuations can hold?
I would look for a combination of earnings resilience and financial discipline.
First, companies should consistently meet or exceed earnings expectations without relying entirely on optimistic forward guidance.
Second, free cash flow should improve as AI investments begin generating returns.
Third, valuations should remain reasonable relative to realistic growth expectations, rather than assuming that exceptional growth will continue indefinitely.
Finally, companies should demonstrate that they can maintain profitability even if financing costs remain elevated.
No single metric can guarantee that a stock will perform well, but these indicators provide a stronger foundation than short-term price momentum.
My takeaway
The next stage of the technology rally may be less about finding the company with the biggest AI story and more about identifying which businesses can turn that opportunity into sustainable earnings and cash flow.
AMD’s gain and Nvidia’s decline on Wednesday do not establish a lasting trend, but they illustrate why investors should assess companies individually rather than treating technology as one trade.
If earnings growth catches up with valuations, the sector may be able to withstand higher rates. If expectations continue rising faster than actual financial performance, even strong companies could face valuation pressure.
For me, the most convincing evidence would be sustained earnings growth, improving free cash flow and disciplined capital allocation, all while inflation and interest rates remain uncertain.
For discussion purposes only. Not financial advice.
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