AI sector turbulence raises concerns over market stability

London, Oct 27 – Market analysts say the AI boom that has supported equity markets for more than two years showed signs of strain in October. A recent bout of volatility in AI stocks coincided with a sharp move in government bond yields, prompting investors to seek protection against a possible slowdown in AI activity.

Societe Generale strategists noted an unusual correlation between equity prices and bond yields, the strongest since the late 1990s, indicating that higher yields could become a headwind for equities. The firm wrote, "This increasingly negative sensitivity to rates has left the market in a fragile equilibrium, with any further rise in yields becoming an incremental headwind to equities."

Data from Goldman Sachs showed that systematic long-short hedge funds recorded a 2% loss, their worst weekly performance since 2024. Meanwhile, the VIX volatility index rose modestly but remains well below its historic average, leading some regulators to warn that it may understate broader market risk.

Morgan Stanley projected a 50% rise in AI investment spending by 2027 but cautioned that higher capital costs could affect more leveraged parts of the AI ecosystem. The firm said, "As the AI capital cycle matures, credit quality, collateral, and structure will matter more, not less. The capital will be there, but increasingly on different terms for different borrowers."

Barclays analysts added that AI-linked borrowers are showing widening performance gaps, making it difficult to treat the sector as a single corporate-debt category. With additional macro-economic pressures from elections, geopolitical tensions and energy concerns, market participants may face further testing of risk tolerance.