Experienced investors are typically aware of the effects of interest rates on stocks. The tightening of interest rates was a factor in the bear market of 2022, and conversely, the recent rate reduction should be bullish for the market.
The question is how it will affect tech stocks. With some evidence that the American consumer is "tapped out," the benefit is most likely to accrue to companies serving businesses. Knowing that, investors should probably take a closer look at these three stocks that depend heavily on business activity.
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1. Broadcom
Broadcom (AVGO 0.60%) specializes in semiconductor and software solutions for businesses. It locates teams of engineers near key clients, and they collaboratively develop solutions that meet client needs.
In the artificial intelligence (AI) market, Broadcom has stood out with its custom ASICs and networking chips for hyperscalers. Also, AIOps and virtualization technologies from its VMWare acquisition are among its software-oriented AI applications.
As investors are aware, top tech companies are spending tens of billions of dollars in capital expenditures (capex) this year alone to stay competitive. Hence, lower interest rates will enable more tech companies to make the necessary investments to keep up in this AI arms race.
To this end, Broadcom has already spent $8 billion in research and development in the first nine months of fiscal 2025 (ended Aug. 3), up from $7.1 billion in the same year-ago period. That spending will likely help Broadcom improve its AI products and serve more clients.
NASDAQ: AVGO
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Thanks to the stock's 10-fold increase over the last 10 years, it supports an 88 P/E ratio and a forward P/E ratio of 51. Although those valuations are not cheap, it likely gives investors room to buy as customers increase spending on Broadcom's AI.
2. DigitalOcean
DigitalOcean (DOCN +2.22%) specializes in cloud and AI services for small and medium-sized businesses.
It stands out from the largest cloud companies through transparent pricing, which allows enterprises to buy as few or as many services as needed. Additionally, the DigitalOcean community helps companies solve IT-related problems without the need to hire expensive personnel.
Moreover, high interest rates have hit smaller enterprises particularly hard. Consequently, DigitalOcean's revenue growth slowed considerably. In the first half of 2025, revenue of $429 million rose by 14% compared to the same year-ago period, lagging the 20% compound annual growth rate (CAGR) forecast by Grand View Research for the cloud industry through 2030.
With that, its stock remains stuck in a range, and while its 28 P/E ratio is not low, it is far from the premium commanded by other growth stocks.
NYSE: DOCN
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Nonetheless, lower interest rates could offer DigitalOcean's customers some long-awaited relief. If small business growth begins to improve, DigitalOcean may have the catalyst it needs to break out of its range.
3. Block
Block (XYZ 3.25%) has stood out with its Cash App digital wallet, which has competed aggressively with PayPal's Venmo. Indeed, lower rates could help that part of the business if consumers spend more. However, it is its Square fintech ecosystem that may reap the most benefits from lower interest rates.
The company has built an extensive ecosystem that encompasses numerous payment applications designed for businesses of all sizes. Point-of-sale, payroll management, capital raising, and even an industrial bank are among its offerings. As lower-cost capital becomes more available, businesses have more incentive to consider Square and utilize its applications.
Admittedly, Block's Bitcoin business forces it to consider the Bitcoin it buys and sells as revenue, making that a misleading measure. Still, gross profit in the first six months of the year rose 12% yearly. Also, since Square accounted for 40% of the company's gross profit during that period, it should lead to higher gross profit growth over time.
NYSE: XYZ
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Additionally, Block stock made modest gains over the last year. Nonetheless, considering its P/E ratio of 16, investors may finally bid this stock higher if lower interest rates bring more businesses into the Square ecosystem.
