Investors may be feeling hesitant about artificial intelligence stocks as credit risks begin to escalate. Dario Perkins, an economist at TS Lombard, noted, "Investors previously had little concern about leverage or credit in the AI sector because hyperscalers were funding developments through their cash flow. However, circumstances have shifted, and debt is increasingly becoming a key source of funding." Recently, U.S. equity markets faced turmoil largely due to concerns surrounding CoreWeave, which appears to be accumulating excessive debt for its AI expansion. The company’s stock dropped 25% last week, with an additional decline of 2% this week. Markets experienced further setbacks on Thursday after Nvidia CEO Jensen Huang stated in an interview with CNBC that the shortage of capital is stifling AI growth.
Huang indicated, "The demand for neo clouds is unparalleled; however, what is lacking is the working capital needed to support this growth. The vast demand for AI solutions across various sectors has created a capital scarcity." As AI firms increasingly rely on debt to finance their growth, Perkins warns that the pace of borrowing may be accelerating too rapidly. "In 2027, it's projected that AI companies will issue approximately $700 billion in new bonds, divided between hyperscalers ($400 billion) and the broader AI ecosystem. For context, this amount exceeds the total bond issuance of all euro-area governments grappling with their own debt crises," he explained. This situation raises concerns that if credit markets become the primary funding source, an external entity could restrict access to necessary credit—despite tech insiders’ willingness to invest heavily.
Additionally, the cost of borrowing is expected to increase. The Federal Reserve is slated to maintain its overnight benchmark interest rate in the 3.75%-4% range during its upcoming meeting, having raised rates by a quarter percentage point this past September. According to the CME Group's FedWatch tool, there's a 75% probability that the Fed will implement another rate hike of 25 basis points in December. Should oil prices remain high and increase consumer goods costs, this could compel the Fed to adopt a tighter monetary policy.
On a brighter note, many AI companies appear to be on solid footing financially. Meta Platforms recently reported a 26% revenue increase for the September quarter compared to the same period last year. Analyst John Butters from FactSet highlighted last week that earnings for the "Magnificent Seven" companies are predicted to grow by 33% year-over-year in the latest quarter. The pressing question for investors now is whether AI companies can substantiate their rapidly climbing levels of debt.
