The first cracks in the AI trade are beginning to appear in credit markets, with credit-default swap spreads widening across several AI-linked names as bond investors start examining the buildout through a less forgiving lens. According to Apollo's Torsten Slok, credit spreads have widened across the hyperscaler complex, with Oracle (NYSE:ORCL) and CoreWeave (NASDAQ:CRWV) standing out as more obvious pressure points. The market is now asking four critical questions about the AI boom: whether the extraordinary capital-expenditure cycle will generate adequate returns quickly enough, how the buildout is being financed as companies increasingly turn to debt markets, whether demand for compute is genuinely limitless, and what happens if the payoff is merely delayed. The widening in AI-related credit spreads suggests the market is beginning to reverse the logic that spending is automatically viewed as strength, with spending increasingly being judged as a liability that must earn its way off the balance sheet.
Global equity markets experienced significant pressure as concerns about AI investment renewed a sell-off in semiconductor shares. According to LGT Bank, Asian equities fell sharply on Tuesday with South Korea's KOSPI dropping 10% and Japan's Nikkei 225 falling as much as 4% after reports that chipmaker Nvidia's AI financing commitments had surpassed USD 750 billion. The selloff was particularly pronounced in semiconductor-related stocks, with SK Hynix and Samsung Electronics leading losses in Seoul, while Japanese chip-equipment groups also declined amid concerns about China's progress in domestic lithography technology. However, Chinese and Hong Kong technology shares proved more resilient, supported by optimism over Beijing's drive for semiconductor self-sufficiency. The MSCI All Country World Price index fell 0.6% to its lowest since June 29, highlighting the global scope of the current market downturn. Recent market analysis shows that while there has always been a lack of clarity on how and when profits will be made for the companies that owned the data centers and sold the tokens, there has been a sense of certainty in the "picks & shovels" needed to build the data centers. However, in the last month, a lot of the major gains in semiconductors have been clawed back as doubts emerge about how many proposed data centers will ultimately get built.
The Federal Reserve's decision to maintain rates at 3.50%-3.75% with three dissents for an immediate hike has intensified concerns about the cost of financing the AI boom. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan all dissented in favour of a 25-basis-point increase, while Kevin Warsh made clear that leaving rates unchanged was not a declaration of victory over inflation. The market's initial relief at avoiding an immediate hike was short-lived as long-dated Treasury yields rose sharply, with the 30-year yield forcing its way back toward levels the market had not seen in almost two decades. Oil prices surged again as the conflict involving Iran, the United States and regional actors returned to a more dangerous phase, reigniting inflation premiums and driving violent curve steepening as the long end delivered its own rate increase. For the AI complex, this represents a critical inflection point where the cost of financing the AI boom did not stand still despite the Fed's decision to leave overnight rates unchanged. The market is now being asked to believe that cash flows will not only arrive, but arrive quickly enough to outrun a rising long-end yield, widening credit spreads and the cumulative weight of the spending already committed.
Investors are drawing parallels with Michael Burry's successful 2008 bet against subprime mortgage securities, as rising credit default swaps on major technology companies fuel concerns over a potential AI-driven market correction. According to The Economic Times, Burry's credit default swaps made him millions during the 2008 financial collapse, and investors are now worrying if the rising CDS for big tech giants today may be a signal for a big AI-driven market crash in the near future. Banks mostly dominate the corporate CDS market, but technology companies are gradually gaining ground, with trading linked to the sector reaching nearly $650 million in the second quarter, up 20% from the first quarter and almost 600% from a year earlier, as reported by Reuters. Average daily trades, even for large companies, can sometimes be in the single digits, meaning small transactions can have an outsized impact on prices. Burry himself is betting against the AI giants, further spooking investors, having written on a Substack post that he sees many indicators, both technical and fundamental, lining up for conditions similar to the Dotcom crash. "1999 went where no market had gone before, and I would say so can this one...It is already there on a number of indicators," he stated, arguing that massive venture capital flows, rising AI debt issuance, and extreme market optimism are creating conditions where valuations may detach from economic reality.
Ratings agency Fitch has issued a stark warning about the credit risks emerging from the AI investment boom, highlighting concerns that soaring technology valuations and unprecedented AI-related spending may be outpacing uncertain future returns. In its third-quarter Global Risk Outlook, Fitch identified the artificial intelligence boom and the possibility of a sharp market correction as major global credit risks, with the agency noting that the scale of AI-related spending has created significant exposure for economies and markets if valuations face a sharp reversal. The warning comes as investors remain increasingly cautious about the sustainability of the AI-driven rally, with AI-linked stocks across Asia coming under pressure amid concerns over funding requirements, profitability and intensifying competition from China. Fitch noted that the cyclically adjusted price-to-earnings ratio of the U.S. S&P 500 has risen close to levels witnessed during the late-1990s dotcom boom, while U.S. corporate bond issuance jumped 26% in the first half of 2026, largely supported by fundraising linked to artificial intelligence investments. The agency expects global economic growth to slow to 2.4% in 2026, while forecasting U.S. inflation to end the year at 3.7%, partly due to the impact of higher energy prices and climate-related shocks.
Recent market analysis reveals that credit default swaps for the five largest US hyperscalers have increased from 115 bps to 162 bps in recent months, with the cost of insurance for a basket containing Amazon, Meta, Microsoft, Google, and Oracle rising by almost 50%. However, Investing.com India analysis suggests this bearish narrative may be overstated, as excluding Oracle, the four other hyperscalers' credit spreads have remained relatively flat and have been at or below the AA-rated corporate bond index since the start of 2025. Oracle's five-year CDS spread has risen from below 50 bps in mid-2025 to 200 bps today, with the company's bonds trading at yields of 6.23% for February 2031 maturity, about 180 basis points above five-year Treasury rates. Oracle's debt-to-equity ratio of 4x significantly exceeds the other hyperscalers' ratios: Microsoft (0.30x), Meta (0.36x), Google (0.18x), and Amazon (0.51x). The analysis indicates that Oracle's credit concerns are driven by balance sheet stress from debt-fueled AI infrastructure spending and a credit rating teetering just above junk territory, while the other four major hyperscalers maintain high investment-grade ratings with Microsoft holding AAA status from both S&P and Moody's, Amazon rated AA by S&P, Google at AA+, and Meta recently upgraded to Aa3 by Moody's.
