Wall Street strategists are warning that the collapse in shares of AI cloud computing providers may spread into other parts of the technology trade, potentially pulling the broader US stock market back toward its June lows.
CoreWeave Inc., the company at the center of the turmoil after its bonds plunged to distressed levels this month, has seen its shares fall 41% since Oct. 6. Major US equity indexes had reached a fresh record on that date.
Other neocloud companies, which provide computing power to businesses developing and operating artificial intelligence models, have suffered similarly punishing declines. Iren Ltd. is down 40% over the same period, while Nebius Group NV has dropped 36%.
The selloff reflects mounting concern about the debt accumulated by companies involved in the AI buildout. Investors are also worried about how much additional borrowing those companies may pursue after reporting earnings.
Those fears pushed measures of credit risk for some of the largest technology companies spending on AI development to new highs last week. The pressure is no longer confined to a narrow group of speculative providers.
The Nasdaq 100 declined nearly 3% on Thursday, while the S&P 500 recorded its worst day since late July. Strategists now see the damage spreading further through the equity market.
“It’s now transitioning from being a micro event to a macro event,” Brian Reynolds, chief market strategist at Reynolds Strategy LLC, said of the neocloud selloff. “In other words, it’s not just impacting the neoclouds, but the entire credit market and then the stock market.”
Reynolds expects additional selling could drive the S&P 500 back to its lows from early June. Such a decline would amount to a 4.7% drop from the benchmark’s Friday close.
Neocloud companies depend heavily on bond issuance to finance their spending. With US Treasury yields climbing and inflation remaining entrenched, their financing costs are rising at a difficult moment for the AI investment boom.
Ohsung Kwon, chief equity strategist at Wells Fargo & Co., warned that attempts by neocloud companies to calm investors by reducing future capital spending could hurt semiconductor businesses. Those chip companies receive revenue from data center developers making enormous hardware purchases.
“If they start to see risk around their financing and the market pushes back on their capex a lot more than what we’re seeing today, and if they cut capex next year, that’s going to be a risk to semis,” Kwon said in an interview.
The Philadelphia Stock Exchange Semiconductor Index has fallen 15% so far in October. The decline shows how worries about heavily indebted AI infrastructure providers are already weighing on companies supplying the chips behind the expansion.
Several Wall Street strategists now view the neocloud meltdown as a reality check for a market already uneasy about an AI bubble. Sevens Report founder Tom Essaye said a bursting bubble would probably begin with trouble in credit markets.
“If the AI bubble is going to burst, it’ll likely start as a credit event as neocloud and risky AI debt defaults, creating a cascade of devaluations, reduced spending and contraction (in multiples and growth),” Essaye wrote in a note last week. He said he continues to watch for indications of credit stress.
Barclays Plc strategists led by Venu Krishna said neocloud stocks are showing “asymmetric” reactions to credit pressure. “Widening spreads prompt outsized declines, while tightening provides limited relief, underscoring skepticism around the neocloud business model’s durability,” they wrote last week.
Krishna is watching for “signs of contagion” in equities, although he has not yet seen evidence that the problem has moved beyond technology and growth stocks. Investors have instead shifted from soaring technology names toward defensive sectors, indicating uncertainty about the AI trade rather than indiscriminate liquidation.
Even so, weakness in the market’s largest sector by weight has dragged the major indexes lower. On Thursday, the S&P 500 lost more than 1% despite finishing the session with more advancing stocks than declining ones.
The benchmark also broke below its 50 day moving average on Thursday. Reynolds said it may fall to its June lows, where he would become a buyer, but he plans to remain defensive for the next few weeks.
“I want to be defensive in the very near term, for a few weeks,” Reynolds said. “I really want to buy at that low 7,200 area.”