Key Takeaways
- The 30-year Treasury yield hit 5.56%, its highest level since 2004, about a week after the Fed raised its benchmark rate by a quarter point to 3.75%-4%.
- Bill Ackman argues AI spending won’t slow in response to higher rates, because the payoff from winning the superintelligence race is so large.
- I think he’s mostly right that AI spending could be insensitive to rate hikes, which is good for NVIDIA and a problem for the Fed’s playbook.
- The main risks are higher borrowing costs for debt-funded AI projects and a broader stock market correction, with investors putting the odds of another hike in October at 64%.
Treasury yields are spiking, and NVIDIA (NVDA) customers don’t seem to care one bit.
The 30-year Treasury is now sitting at a hair over 5.5%, which is…I won’t say unheard of, but hasn’t happened in 30 years.
Nonetheless, tech stocks keep chugging higher.
Pershing Square CEO Bill Ackman thinks he knows why. In a post on X, he argued that “the demand for intelligence and energy is unaffected by higher rates because winning the race for super intelligence has a near infinite ROI and the demand for compute will remain incalculable.”
His conclusion? “I think the Fed might have just made a mistake.”
If he’s right, that’s a problem for the Fed and a gift for NVIDIA.
Quick refresher: How rate hikes are supposed to work
On Sept. 16, in a 12-0 vote, the Federal Reserve raised rates by 25 basis points to combat inflation.
The playbook goes like this:
- Higher rates make borrowing more expensive.
- So people and companies borrow and spend less. That means fewer new cars and fewer new factories.
- Less demand means less pressure on prices, and inflation cools.
Ackman is taking aim at step two. He says the whole approach “is predicated on the belief that higher rates reduce demand and investment.”
One more wrinkle: the Fed only sets short-term rates. Long-term yields like the 30-year are set by bond investors. Neither is heading down. Investors have raised their bets on another Fed hike in October to 64%, per Yahoo Finance.
And Oaktree Capital co-founder Howard Marks said on Prof G Markets that “interest rates probably will not be going down much, if at all, in the coming year or two.” He tied that largely to worries about U.S. debt and deficits.
Put differently: according to the textbook, this is exactly the kind of environment where big spending plans should get shelved.
So is anyone pulling back?
Not the companies buying NVIDIA’s chips. Consider capital spending at Microsoft (MSFT)…
Doesn’t look like a company sweating its borrowing costs to me. Of course, we wouldn’t expect the most recent hike to show up in the numbers until Microsoft reports this quarter’s results. But do you really think a 25 basis point increase is going to shift Microsoft’s spending at this scale?
Meta Platforms (META) tells the same story. Same with Alphabet (GOOGL).
And of course, we know the Frontier Labs are moving just as aggressively.
And so much of that spending lands in one place: NVIDIA’s top line.
Yep, that’s trillion with a “T.”
Why a quarter point doesn’t register
A quarter point on a $400,000 mortgage works out to roughly $1,000 more in interest per year (a bit less as the loan pays down). That’s enough to make a family think twice.
A quarter point on a bet that could decide who leads the next era of computing? Rounding error.
Imagine telling John F. Kennedy the Moon shot was off because borrowing costs went up a quarter point. Same deal here.
But what about all that debt?
Weirdly enough, I think that makes Ackman’s case stronger.
His point isn’t that rates don’t matter. It’s that the spending keeps coming anyway, so higher rates just make everything cost more: “Why won’t higher rates at this unique moment in history therefore lead to more inflation as interest costs are embedded in everything?”
And it snowballs: “the more the Fed raises rates, the more inflation we will have and the more the Fed will need to raise rates further and so on.”
EY-Parthenon chief economist Gregory Daco made a similar point. In the same Yahoo Finance story, he said more hikes “could create further strain for already constrained, interest-sensitive sectors while doing little to slow the AI-led investment surge, though it could increase the risk of a stock market correction.”
Right and wrong
My view is that Ackman partly right: AI spending hasn’t flinched at higher rates, and I don’t expect another quarter point to change that. (Or another quarter point after that either.) That leaves the Fed in a tough spot. If the biggest spenders in the economy don’t respond to hikes, the pain lands on everyone else: the “interest-sensitive sectors” Daco mentioned, like housing and small businesses. Meanwhile, the AI build-out keeps going.
The only problem is: If the broader economy enters a recession, at some point the consumer pain catches up. If consumers cut spending, eventually the businesses selling to them have to cut spending to stay profitable. And at some point, they start taking a good hard look at the AI line-item on their P&L.
It could just mean a long plateau…and then a very ugly correction at the end.
So what does that mean for NVIDIA?
The future is hard to predict! One thing I will say, though, is that forward estimates like what I just showed above get a lot more useful in moments like these. Analysts are keeping a close eye on the supply chain, and if there are cracks in the AI trade, they’ll show up in lowered estimates/price targets fairly early.
Think of them as your “early warning.”
That’s why I use TIKR’s robust dataset for all my investing.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
