The U.S. Federal Reserve has increased the effective federal funds rate by 0.25%, now ranging between 3.75% and 4%. This is the first hike in three years, prompted by persistent inflation, historically high energy costs, and increased bond rates amid an ongoing conflict in Iran that began in February.
Investors had anticipated multiple rate cuts in 2026 that would invigorate capital markets and encourage mergers and acquisitions. However, events took a sharp turn on February 28 after joint U.S.-Israeli military actions against Iran disrupted traffic in the Strait of Hormuz, a crucial maritime route for approximately 20% of the world’s oil shipments before the conflict.
Several factors significantly influenced the Fed's rate hike decision. Currently, the average gas price in the U.S. is $4.36, up from $3.18 a year ago, while diesel has reached a record $6.31 per gallon. Brent crude oil prices have surged past $100 per barrel compared to around $68 the previous year. Inflation is currently at 3.4%, compared to 2.9% last year, and U.S. Treasuries with 10, 20, and 30-year maturities have seen their highest rates in decades.
Federal Reserve Chair Kevin Warsh, who took office in May, initially kept rates steady during his first three meetings despite strong pressure for a hike due to inflation remaining above the Fed’s 2% target. The growing calls for an increase became untenable, resulting in this first rate hike since August 2023.
At a press conference, Warsh stated, “The decision we made today was the right decision to deliver on the remit that Congress gave us to ensure stable prices… Some months ago I said we will deliver stable prices, today’s action is consistent with that.”
For the gaming sector, this abrupt economic shift toward elevated interest rates could dampen the optimism that was prevalent at the beginning of the year. Many leading gaming stocks have lagged behind the broader market in recent years. Most mergers and acquisitions in the industry have been conducted by private equity and similar institutions, capable of capitalizing on lower valuations, while there was hopes that falling rates could relieve financial pressures.
Chad Beynon, a gaming analyst at Macquarie, explained, “Publicly traded valuations are a reflection of the current interest rate environment. Whether it’s a long-term model for a growth company or a standard four-wall business, cash flows in a higher interest rate environment are worth less.”
Data from Yahoo Finance indicates that the resort and casino sector has fallen by 41% over the last five years, while the overall gambling sector, which includes major sportsbooks and online operators, has gained 7%. In contrast, the benchmark S&P 500 index has risen by 71% during the same period.
This year saw two significant casino developments, including Fertitta Entertainment’s acquisition of Caesars Entertainment in May and a takeover offer for MGM Resorts from its largest shareholder, Barry Diller’s People Inc. However, deteriorating market conditions could impact both transactions.
Fertitta's General Counsel, Steven Scheinthal, informed the Nevada Gaming Control Board in July that the company had a letter of intent from banks to finance the Caesars deal but was waiting for more favorable borrowing conditions. Fertitta is on the hook for nearly $12 billion in Caesars’ debt along with a $6.6 billion financing package.
Scheinthal expressed optimism, stating, “Our hope is that in the next few months there will be a window of opportunity where the market will be hotter and [it’s] a more interest rate-friendly environment where we can go raise the money.” However, such a window appears to be moving further out of reach.
Caesars’ proxy filing revealed that during negotiations in spring, Fertitta opted not to exceed its $31-per-share offer due to high financing costs and macroeconomic risks. His decision led to an additional yearly cost of approximately $40 million compared to earlier in the transaction process.
Diller also submitted an all-cash offer of $48.30 per share for MGM shortly after the Caesars deal announcement. People Inc. concluded Q2 with $1.1 billion in cash, yet financing will still be necessary to acquire 74% of the shares along with MGM’s significant debt over $6 billion. An independent committee at MGM has been tasked with reviewing the offer but has yet to comment further.
Looking ahead, historical trends suggest that this latest rate hike may not be the last. Since the 1990s, the Federal Open Market Committee has paused after an initial rate hike only once. Typically, the Central Bank has increased rates six to seven times in a rate hike cycle. Warsh expressed confidence in the economy's stability moving forward, stating, “Economic activity is expanding at a solid pace. While uncertainty remains elevated, domestic spending has been resilient, productivity growth is strong, and capital investment is robust.”
Following the Fed's decision, the probability of an additional rate hike this year surged to 48%. Traders are now assessing the likelihood of the upper bound of the Fed Funds Rate reaching 4.25% by the end of 2026, with a 21% chance that the Fed may not alter rates for the rest of the year.
Data from Multiples.VC indicates that leading U.S.-listed gaming companies have an average enterprise multiple of 10x. In contrast, New York University’s figures show an average market multiple of 23.9x and 19.7x among profitable companies, highlighting the gaming sector’s undervaluation against other industries. Despite some consumer challenges, Fitch Ratings recently affirmed a “Stable” outlook for most North American gaming firms, indicating they possess adequate rating headroom.
Macquarie's Beynon concurs, noting the relative stability observed in gaming companies during challenging economic periods like the COVID-19 pandemic. He pointed out that bankruptcies within the sector remain low compared to the broader market, giving both land-based and digital companies cause for optimism looking ahead. He stated, “We’ve thought there’s been value in the sector for a few years, particularly this year.”
