Wall Street strategists warn that declines in shares of AI cloud-computing providers could spill into other areas of the tech trade and potentially drag the US stock market down to its June lows. CoreWeave Inc., at the center of the tumult after its bonds plunged to distressed levels this month, has seen its shares drop 41% since Oct. 6, when major US equity indexes hit a fresh record. Other neoclouds, which provide computing power to firms building and running artificial intelligence models, have also posted double-digit declines. Iren Ltd. is down 40%, while Nebius Group NV has dropped 36%.
Investors are worried about the debt companies involved in the AI build-out have taken on and how much more they may borrow after reporting earnings. These fears pushed measures of credit risk for some of the biggest technology companies spending on AI to new highs last week. After a bruising Thursday, when the Nasdaq 100 declined nearly 3% and the S&P 500 had its worst day since late July, Brian Reynolds of Reynolds Strategy LLC said the selloff is "transitioning from being a micro event to a macro event." Reynolds expects further selling could push the S&P 500 back to its early June lows, a 4.7% drop from Friday's close.
Neoclouds rely heavily on bond issuance to fund their spending, and with US Treasury yields climbing and inflation entrenched, financing costs are rising. Wells Fargo & Co. chief equity strategist Ohsung Kwon said that if neoclouds cut future capital expenditure, it would be a major headwind to semiconductors. The Philadelphia Stock Exchange Semiconductor Index has dropped 15% so far in October.
Several strategists have also warned that the neocloud meltdown offers a reality check amid anxiety about an AI bubble. Sevens Report founder Tom Essaye said the bubble would likely start as a credit event, while Barclays strategists led by Venu Krishna noted that neocloud stocks respond asymmetrically to credit stress. Krishna said he is watching for signs of contagion but has not yet seen the issue spread beyond tech and growth stocks.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing