AI sector faces credit stress and valuation drop as investors grow cautious

Investors have shifted from a rosy outlook on artificial-intelligence investments to a more cautious stance, prompting a sharp sell-off in AI-related equities. Credit stress at cloud-computing firm CoreWeave has intensified, with the yield on its 9.75% bond due in 2031 climbing to 15.78% and its five-year credit-default-swap spread briefly exceeding 1,140 basis points, a level that signals distress, according to Gavan Nolan, executive director of fixed income pricing at S&P Global Market Intelligence.

The heightened risk perception has led to a rotation out of the sector, with major AI players such as Nvidia, AMD and Intel falling between 1.5% and 2.8%, while Dell Technologies dropped 6.8%. Across 20 of the world’s largest AI and semiconductor companies, market value fell by more than $1 trillion this week, pressured by higher interest rates, tighter AI financing and intensifying competition.

Nvidia CEO Jensen Huang also warned that the industry must cooperate with Chinese AI firms to monitor “potentially dangerous” technology, emphasizing the need for safe development. The call for greater safety follows recent appeals from researchers at OpenAI and Anthropic for a slowdown in AI progress due to existential risk concerns.

Despite the financing worries, demand for advanced chips remains robust. Taiwan Semiconductor Manufacturing Company reported a record profit for a sixth consecutive quarter and projected fourth-quarter revenue 58% higher than a year earlier, driven by strong orders for its cutting-edge processes. Jordan Klein, an analyst at Mizuho Securities, noted that competition for chip capacity is “extremely fierce.”

Inflation pressures continue to loom over the market. U.S. producer-price growth rose 6.3% year-on-year in September, the fastest increase since December 2022, while consumer inflation also exceeded expectations. Federal Reserve Chair Kevin Warsh is slated to appear with IMF Managing Director Kristalina Georgieva before the central bank’s policy-making blackout period, underscoring the uncertainty surrounding future rate moves and their potential impact on equities, bonds and currencies.