The U.S. Federal Reserve recently cut interest rates by 25 basis points in September 2025, lowering the federal funds rate to a range of 4.00%–4.25%. This marks the first rate cut since December 2024 and has sparked a fresh debate about the future of growth sectors, especially information technology (IT). For IT stocks, which are highly sensitive to interest rate movements, this policy shift is both an opportunity and a source of risk.
The rate cut signals that the Fed has begun loosening its monetary policy after a long period of high interest rates. Policymakers also hinted that two more cuts of 25 basis points each could come in October and December 2025, provided economic data supports such a move. This shows that the central bank is trying to balance between slowing inflation and supporting economic growth.
Inflation, however, still remains above the Fed’s target. Core inflation continues to stay sticky, and unemployment has edged slightly higher. At the same time, U.S. economic growth forecasts for 2025 have been revised upward to about 1.6% from earlier estimates of 1.4%. This combination of modest growth and persistent inflation makes the Fed’s task complicated, but it gives some breathing space to markets that were expecting relief from high borrowing costs.
How Markets Reacted
Immediately after the announcement, U.S. stock markets rallied. The S&P 500 and Nasdaq touched fresh highs, and technology stocks led the way. Semiconductor shares, in particular, surged on optimism around artificial intelligence and chip demand. Intel’s partnership with Nvidia gave investors another reason to pour money into the sector, and this lifted overall sentiment in the technology space.
However, not all signals were positive. U.S. Treasury yields rose, especially on longer-term bonds, showing that investors remain cautious about inflation risks. The Fed also repeated that future policy moves would depend on upcoming data. This means that the markets cannot take a rapid or aggressive easing cycle for granted.
Lower interest rates reduce the cost of borrowing for businesses. This is especially important for IT companies that invest heavily in data centers, chip manufacturing facilities, and cloud infrastructure. Cheaper loans make it easier to finance expansion plans and fund innovation.
Falling rates also improve valuations for growth companies. Investors calculate the value of future profits by discounting them to the present using prevailing interest rates. When rates fall, those future earnings look more attractive, leading to higher stock prices. This is why technology and other growth sectors often benefit the most when the Fed cuts rates.
Another advantage is that lower rates support overall demand in the economy. Businesses may increase their budgets for digital transformation, cloud adoption, and cybersecurity when financing costs fall. Consumers too may spend more on gadgets and software services if credit becomes cheaper. This creates a supportive environment for IT revenues.
Despite the short-term optimism, there are risks that could spoil the rally. Inflation remains above target, and if it does not ease, the Fed may slow down or even reverse its rate cuts. Any signal of caution from the central bank could pull down IT valuations quickly.
The labor market is also showing signs of weakness. Job growth has slowed and unemployment is rising. If this trend continues, consumer demand for tech products could soften. Enterprises may also delay big technology spending plans if the economy weakens further.
IT stocks are already trading at high valuations after the artificial intelligence boom of the past two years. If actual earnings do not match these lofty expectations, sharp corrections cannot be ruled out. Even after the cut, interest rates are still relatively high at 4.00%–4.25%, which means the funding environment is not as easy as it was during the ultra-low rate years.
The Fed’s decision also matters for Indian IT companies, which depend heavily on U.S. clients for revenues. A softer rate environment in the U.S. could make it easier for American companies to spend on outsourcing and digital services. This explains why shares of Indian IT majors like Infosys and LTIMindtree gained after the Fed announcement.
If the U.S. economy avoids a deep slowdown, Indian IT firms could see better order flows and stronger deal pipelines in the coming quarters. A weaker dollar, which often accompanies lower rates, can also benefit clients in the U.S. and indirectly support demand for Indian services. However, if inflation forces the Fed to hold back on future cuts, the optimism could fade quickly.
The direction of IT stocks will depend heavily on how economic data unfolds in the coming months. Inflation numbers, especially the core Personal Consumption Expenditures index, will be closely watched. Labor market data such as unemployment and job creation will also play a major role.
Corporate earnings and forward guidance from technology giants will be equally critical. Investors will be looking at revenue growth, profit margins, and capital spending plans in areas such as artificial intelligence, cloud computing, and semiconductors. Geopolitical tensions and regulatory moves, especially around AI and chip supply chains, could also influence performance.
If inflation cools gradually and the Fed sticks to its plan of cutting rates further this year, IT stocks could see continued gains. Valuations may expand, and investor interest in AI and semiconductor themes could remain strong.
If inflation remains stubborn and forces the Fed to slow its cuts, IT stocks may face volatility. Growth stocks usually underperform in such conditions because their valuations are more sensitive to interest rates.
A “soft landing” scenario, where the economy slows but does not tip into a recession, would be the most favorable outcome. In this case, IT demand would remain steady, and the sector could outperform. On the other hand, if growth collapses and a recession emerges, even rate cuts may not save IT from weaker earnings and falling stock prices.
The Fed’s 25-basis-point rate cut has provided a short-term boost to IT stocks, with strong rallies in U.S. tech indices and Indian IT majors. The environment looks supportive, but risks remain. Inflation is still high, unemployment is rising, and valuations are stretched.
The future of IT stocks will largely depend on whether the Fed can keep cutting rates without triggering inflation worries, and whether the U.S. economy can avoid a recession. Companies with strong fundamentals, healthy balance sheets, and exposure to long-term themes such as cloud, semiconductors, and artificial intelligence are likely to fare better.
The months ahead will be a test of whether the optimism around this rate cut can turn into sustained gains or whether volatility will dominate as economic data shifts.