How exactly do high interest rates impact tech stocks? Here are 6 ways

We all know high interest rates impact tech stocks – yesterday’s hike by the RBA led to the ASX 200’s list of laggards today dominated by the largest tech companies including WiseTech, Xero and TechnologyOne.

But while most investors would know that fact, not all investors would be aware of just how they do. In this article, we will answer what question.

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How exactly do high interest rates impact tech stocks?

When central banks raise interest rates it changes the economic and financial environment in ways that tend to matter more for technology stocks than for many other kinds of companies. Tech companies, especially high-growth ones, are typically valued not so much on what they are earning today but on the profits investors expect them to generate far in the future.

Valuation models analysts use, especially the discounted cash flow (DCF) model, work by taking expected future earnings and “discounting” them back to their present value using a rate that reflects the cost of capital. When interest rates rise, that discount rate goes up, which mathematically lowers the present value of distant future earnings.

Because tech stocks often have most of their value tied to earnings many years ahead, higher rates can disproportionately reduce their valuations compared with firms whose earnings are more immediate. Higher rates also raise borrowing costs for tech companies and can shift investor preferences toward safer or income-producing assets, further pressuring shares that are priced on growth expectations rather than current profits.

OK, but do higher interest rates actually impact tech companies operations?

They can. Higher rates hit tech through several real-economy channels, and those effects are often more tangible than discount-rate math.

First, let’s talk about borrowing costs. Many tech firms rely heavily on external financing, not just for capex but to fund operating losses while scaling. When rates rise, new debt becomes more expensive and rolling over existing variable-rate or short-maturity debt eats more cash flow. For large, profitable tech companies with fortress balance sheets this is mostly a second-order effect.

But for smaller or growth-stage firms, though, higher interest expense can materially shorten their runway and force strategic changes: delayed product launches, slower hiring, or cutting back on long-term projects that won’t generate cash soon. This is one reason rate hikes tend to hurt “long duration” tech firms more than established incumbents — not just because of valuation, but because funding optionality shrinks.

Secondly there’s consumer demand, which matters more to tech than people sometimes admit. A large slice of tech revenue ultimately depends on discretionary spending: devices, subscriptions, cloud usage tied to business expansion, advertising budgets, gaming, and so on. Higher interest rates squeeze households through higher mortgage payments, credit card interest, and auto loans.

That reduces disposable income, which shows up downstream as slower device replacement cycles, lower ARPU (Average Revenue Per User) for subscription services, and softer ad demand. On the enterprise side, higher rates also raise the cost of capital for tech companies’ customers, making CIOs and CFOs more cautious about software spend, cloud migration timelines, or experimental IT projects. So even if a tech firm itself has no debt problem, its revenue growth can slow because its customer base becomes more rate-sensitive.

Thirdly, relative attractiveness of bonds is another very real channel, but it’s not just about retail investors “choosing bonds instead of stocks.” Rising bond yields change institutional portfolio construction. When risk-free or low-risk yields were near zero, investors were structurally pushed toward equities — especially growth stocks — to meet return targets.

But as yields rise, bonds start to compete again on a risk-adjusted basis. That leads to portfolio rebalancing away from equities with volatile cash flows, and tech sits squarely in that category. Importantly, this is less about predicting tech earnings and more about capital flows: even strong tech companies can see multiple compression simply because the marginal dollar of investment is now happier earning 4–5% in fixed income.

Fourth, rates also affect company cost structures and investment behaviour, including R&D. Tech companies don’t usually cut R&D immediately when rates rise, but sustained tightening changes incentives. Internal hurdle rates go up: projects need clearer, faster payoffs to justify funding. That biases investment away from blue-sky or platform-level innovation and toward incremental or near-term revenue features.

Over time, this can slow innovation pipelines and weaken long-term competitive positioning, even if short-term margins improve. For firms already under margin pressure, higher wage costs combined with higher financing costs can force outright R&D cuts, which markets often interpret negatively even if earnings hold up initially.

Interaction is the key

Also important is how these channels interact. Higher rates don’t just raise costs or lower demand in isolation; they compress growth from both sides. Revenue growth slows because customers pull back, while financing and opportunity costs rise internally.

That combination is particularly damaging for firms whose business models depend on rapid scaling, network effects, or upfront investment before profitability.

That’s why rate hikes tend to hit speculative or small cap tech hardest, while cash-rich large caps are more resilient — even though both are labeled “tech.”

We would also note that the impact is magnified not just because interest rates are rising so fast, but because it had been an entire decade of non-stop growth. Even companies that aren’t going backwards are going to steady states and this is different to being a high-growth company.

Is there really a relationship between rates and tech stocks generally?

Now you might say,’ Of course individual companies can be impacted,’ but does the sector as a whole cop an impact? The data isn’t that conclusive.

Some professional investors and researchers (led by Fisher Investments) have measured the correlation between interest rates (or bond yields as a proxy) and technology stock returns or tech indices. For example, over long historical periods the correlation between a broad tech index’s returns and US Treasury yields has been measured at around -0.10, which is very weak — a correlation of 1 would mean tight co-movement and -1 would mean perfect inverse movement, so -0.10 implies almost no relationship. In other work looking at weekly data, the correlation coefficient between tech returns and yield moves was around 0.23, which again suggests only a shallow, statistically insignificant linkage.

Other empirical studies find that across many decades, monthly changes in interest rates explain very little of the variability in overall equity returns — on the order of 1 % — and that in some periods tech stocks have even shown a slight positive correlation with rising rates, meaning they rose alongside rates rather than fell. These findings come from long-run historical datasets where academic and industry analysts regress sector returns on interest rate changes.

Overall, the statistical historical relationship between interest rates and tech stock returns or tech indices is often weak and inconsistent. There are periods when tech stocks underperform during tightening cycles and other periods when they outperform regardless of rising rates.

Keep in mind these mechanisms operate with lags, vary by firm, and are often swamped in the short run by earnings surprises, technological shifts, or narratives like AI. But at the firm level and over tightening cycles, the economic logic you’re describing is very real — and arguably more important than the neat DCF explanation analysts like to lead with.

So are ASX tech stocks doomed until interest rates fall?

Some are, but not all. Profitable tech stocks that are in the midst of long term growth opportunities will do just fine. Tech stocks doing it tough will be those that are not profitable and in the midst of large markets where they only have a small market share.

Two of our preferred opportunities amidst ASX tech stocks include IT services and the Cloud. Companies in the former space include Atturra (ASX:ATA), while companies in the latter include TechnologyOne (ASX:TNE), and Objective Corporation (ASX:OCL).