The Fed Held Rates, but Tech Stocks Still Have Something to Prove

A rate pause should have been good news for growth stocks. Yet Wednesday’s market reaction was surprisingly restrained.

The S&P 500 rose 0.28%, while the Nasdaq-100 gained around 0.55%. Underneath those modest moves, performance was mixed. AMD climbed 3.24%, while Nvidia slipped 1.17%. Then came the earnings reactions: Microsoft rose after reporting strong results, while Alphabet sold off sharply.

To me, this is what makes the current market interesting. Investors are not treating technology stocks as one big trade anymore. They are becoming more selective about which companies deserve premium valuations and which ones need to prove that their AI investments will pay off.

The Federal Reserve kept its benchmark rate at 3.75%–4.00% on 28 October, but the decision was split 10–2. Two members preferred a quarter-point increase, and the Fed said inflation remained elevated.

In other words, the pause is not a guarantee that borrowing costs will fall soon. That matters for technology companies whose valuations depend heavily on profits expected years into the future.

1. A rate pause helps, but it does not solve the valuation problem

Technology stocks often benefit when interest rates decline because investors place a significant part of their value on future earnings. When market interest rates rise, those future earnings become less valuable in today’s terms, all else being equal.

But I would not reduce the entire technology market to interest rates alone.

A company growing earnings rapidly, expanding margins and generating strong free cash flow may be able to justify a premium valuation even if rates remain elevated. Another company with similar growth expectations but weak cash generation may struggle to defend its share price.

This is why I would pay attention to both the direction of Treasury yields and the quality of each company’s earnings.

If inflation remains stubborn and yields move higher, expensive stocks with limited current cash flow could face renewed pressure. If earnings growth continues to exceed expectations, however, some companies may be able to grow into their valuations.

The question is not simply whether rates rise or fall. It is whether the business can deliver enough value to shareholders under the interest-rate environment we actually have.

2. Microsoft’s results show what investors want to see

Microsoft’s latest quarter offers a useful example of the evidence investors are looking for.

Revenue reached US$92.3 billion, adjusted earnings per share were US$4.89, and Azure revenue grew 48% year over year. These figures point to strong demand for Microsoft’s cloud and AI infrastructure.

However, I would not stop at the headline growth rate.

Building AI capacity requires substantial investment in data centres, servers, networking and power. These investments can support future revenue, but they also consume cash and create depreciation expenses over time.

The real test is whether Microsoft can keep growing Azure while maintaining attractive margins and converting its investment into cash generation.

Its contracted future business provides useful visibility, but contracts are not the same as immediate revenue or guaranteed profit. Investors still need to watch how quickly that backlog converts into sales and whether the returns justify the capital committed.

For a company of Microsoft’s scale, I would be more comfortable paying a premium if strong growth is accompanied by durable profitability and healthy free cash flow.

3. Alphabet’s reaction is a warning against assuming AI spending guarantees returns

Alphabet’s earnings reaction illustrates the other side of the debate.

AI creates opportunities for Google Cloud and new products, but Alphabet must also protect the economics of its core advertising business while investing heavily in infrastructure and competing with other AI platforms.

The market’s response suggests that expectations matter as much as the headline numbers. Even a company with a powerful business and substantial cash-generating capacity can see its share price fall if results or the outlook do not meet what investors were hoping for.

I would watch Google Cloud growth, operating margins, advertising performance and capital expenditure together.

If AI investment helps Alphabet expand its cloud business and improve its competitive position without undermining cash generation, the long-term opportunity remains compelling. If spending continues to rise faster than the returns it produces, investors may become less willing to pay a premium.

A sharp post-earnings decline does not automatically make Alphabet cheap. I would reassess its valuation against updated earnings expectations rather than assume the sell-off itself creates a buying opportunity.

4. What would convince me that tech valuations can hold?

I would look for three things.

First, earnings growth must remain credible. Revenue growth should translate into operating profit, not simply a larger infrastructure bill. Management guidance should support the expectation that current investments will produce meaningful future returns.

Second, free cash flow must justify the spending. High capital expenditure is not necessarily bad for a technology company, especially when demand is strong. But investors should examine how much cash remains after investment and whether the expected payoff is reasonable.

Third, valuations must leave room for disappointment. A business can perform well and still be a poor investment if its share price already assumes near-perfect execution. I would compare valuation with expected earnings growth, margins, cash generation and the risks to those assumptions.

I would also watch the bond market. If Treasury yields rise because inflation remains persistent, technology valuations may face pressure even when corporate earnings are healthy. If yields stabilise while earnings expectations improve, the environment could become more supportive.

Neither outcome should be assumed in advance.

5. My approach: selective buying, not chasing the AI theme

I remain interested in technology and AI infrastructure, but I would not buy a stock simply because it belongs to a popular sector.

For established companies such as Microsoft and Alphabet, I would focus on the relationship between AI spending, earnings growth and free cash flow. For chipmakers such as AMD and Nvidia, I would examine demand visibility, competitive positioning, margins and the expectations already embedded in their share prices.

I would also avoid making an investment decision based solely on one day’s price movement. AMD rising while Nvidia falls does not necessarily mean the market has decided one is fundamentally better. Short-term moves can reflect positioning, expectations and company-specific developments.

If I already owned a business whose fundamentals remained intact, I would not automatically sell because of a temporary decline. If I were considering a new position, I would be more disciplined about entry valuation and retain flexibility to add later rather than commit all my cash at once.

My takeaway

The next phase of the technology rally will depend on more than whether the Fed cuts rates.

A supportive rate environment would help, but sustainable earnings growth, profitable AI investment and strong cash generation are what can make valuations more defensible over time.

For me, the most convincing signal would be a combination of improving earnings expectations, resilient margins and free cash flow that remains healthy even as companies continue investing in AI.

I would rather own a company that can prove its AI investments are creating shareholder value than one whose valuation depends on the promise that they eventually will.

Would you still buy high-valuation technology stocks if interest rates stayed higher for longer, or would you shift towards companies with stronger current cash flow and more reasonable valuations?

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