AI financing concerns trigger unusual market divergence and bond rally
Investors are growing uneasy about the financial health of AI firms, prompting a rare split between the S&P 500's market-value and equal-weight indices and a sharp drop in 10-year Treasury yields.
A rare divergence between the market-value weighted S&P 500, which fell 1.2%, and the equal-weighted S&P 500, which rose 0.5%, was recorded on Oct. 22, a pattern seen only twice since 1995, according to James Reilly, senior markets economist at Capital Economics. The same day, the 10-year Treasury yield slipped below 5%, marking its biggest single-day decline since March 2023.
Analysts linked the shift to mounting worries over the balance sheets of AI-related companies. CoreWeave, a cloud-computing provider for AI workloads, saw its borrowing costs surge to about 15% in early October, reflecting investor doubts about its ability to service debt. A Wall Street Journal report cited Anthropic's draft IPO filing, which projected an $81 billion loss for the first half of 2026, while Meta disclosed a $2 billion cash shortfall in the third quarter, prompting a 7% drop in its stock.
"What we’re seeing is elevated volatility around something that looks and feels and smells like a bubble," said Joe Brusuelas, chief economist for RSM US.
The market move comes amid broader fiscal pressures, including higher oil prices from the Iran conflict, a U.S. debt level near $40 trillion, and a $2 trillion budget deficit, all of which have kept Treasury yields elevated. Some investors are retreating to the safety of U.S. Treasuries and the dollar as they reassess the sustainability of AI-driven debt.
Economists note that while the AI sector faces a potential financing crunch, the overall economy may continue to absorb shocks through a mix of booming and lagging sectors, a pattern described as a "rolling recession."