On Wednesday, the US Federal Reserve increased the effective federal funds rate by 0.25%, bringing it to a range of 3.75%-4%. This marks the first rate hike in three years as the economy faces persistent inflation, soaring energy prices, and rising bond rates amidst the ongoing conflict with Iran that began in February.
Initially, investors anticipated multiple rate cuts in 2026, which typically stimulate capital markets and boost mergers and acquisitions. However, the dynamic shifted following joint US-Israeli airstrikes on Iran on February 28, which disrupted traffic through the Strait of Hormuz, a crucial corridor for approximately 20% of the world’s oil supply.
Several factors influenced the Fed's decision to raise rates. According to AAA, the average nationwide gas price has surged to $4.36, up from $3.18 a year ago, while the average diesel price has reached a record high of $6.31. Brent crude oil prices have also surpassed $100 per barrel, rising from around $68 a year prior. Inflation stood at 3.4% in August, compared to 2.9% the previous year. Additionally, yields on US 10-, 20-, and 30-year Treasury bonds have surged to their highest levels in decades.
Since taking office in May, Fed Chair Kevin Warsh kept rates unchanged for his first three meetings despite growing pressure to raise them due to inflation consistently exceeding the Fed's target of 2%. Ultimately, the need for action led to the first rate hike since August 2023.
"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," Warsh stated at the press conference following the announcement.
The US gaming industry could see a decline in optimism as the economic landscape shifts dramatically in 2026. The reintroduction of elevated interest rates post-Covid could impact the industry's growth.
Many leading gaming stocks have lagged behind the wider market in recent years, and most mergers and acquisitions have been instigated by private equity firms that can adapt more quickly to lower valuations. The hope that interest rates might decrease to relieve some of these strains has diminished.
Chad Beynon, lead gaming analyst at Macquarie, noted, "Publicly traded valuations are a reflection of the current interest rate environment. Whether it's a long-term financial model on a growth company, you're going to discount that back at a higher rate, or if it's just a standard four-wall business, the cash flows in a higher interest rate environment are worth less."
Data from Yahoo Finance indicates that the resort and casino sector has experienced a 41% decline over the past five years, while the overall gambling sector, which includes major sportsbooks and online operators, is up 7%. In comparison, the S&P 500 index has gained 71% over the same period.
Earlier this year, two significant developments in the casino sector indicated rising confidence: Fertitta Entertainment's acquisition of Caesars Entertainment in May and a takeover proposal for MGM Resorts from its principal shareholder, Barry Diller’s People Inc. However, changing market conditions could jeopardize both transactions.
In July, Fertitta's General Counsel, Steven Scheinthal, informed the Nevada Gaming Control Board that while the company had secured a letter of intent from banks to finance the acquisition, it was awaiting better borrowing conditions. Fertitta is set to take on about $12 billion in Caesars' debt and has committed to a $6.6 billion financing package.
"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 raise the money and put it in an escrow account," said Scheinthal at the time.
The anticipated window seems to be moving out of reach. Caesars' proxy filing revealed that despite negotiations in spring, Fertitta declined to increase its $31-per-share offer "due to higher financing costs and increased macroeconomic risks." From the end of 2025 through late April of this year, rising borrowing costs led to an additional $40 million in expenses since the negotiations began.
Diller made an all-cash offer of $48.30 per share for MGM just days after the Caesars deal was finalized. People Inc. concluded Q2 with $1.1 billion in cash; however, to acquire 74% of shares and MGM's long-term debt exceeding $6 billion, some financing will be necessary. MGM set up an independent committee to review the bid but has not provided updates since.
Looking ahead, history suggests that the recent rate hike may not be the last. The Federal Open Market Committee (FOMC) has typically raised rates six to seven times during monetary tightening phases since the 1990s. Warsh expressed optimism regarding the economy's future stability.
"Economic activity is expanding at a solid pace," he remarked. "While uncertainty remains elevated, due in part to geopolitical developments, domestic spending has been resilient, productivity growth is strong, and capital investment is robust."
Post-decision, the likelihood of one more rate increase this year spiked to 48% on Polymarket. The contract asks traders to speculate if the Federal Funds Rate will reach 4.25% by the end of 2026. There is now a 21% chance that the Fed will maintain its current rate for the rest of the year, with a slightly lower chance that it will exceed 4.5%.
According to Multiples.VC, the average enterprise multiple of leading US-listed gaming companies currently stands at 10x. Data from New York University, updated in January, showed the overall market average at 23.9x and 19.7x among profitable firms, indicating the gaming sector is undervalued compared to others. Fitch Ratings reported that most North American gaming firms maintain a “Stable” outlook with “adequate rating headroom” despite facing consumer challenges.
Beynon from Macquarie shares this view, highlighting the relative stability of gaming companies through difficult economic periods such as the Covid-19 pandemic. He observed that bankruptcies in the sector remain low compared to the broader market, and both land-based and digital gaming entities have grounds for optimism.
