NEW YORK, October 19, 2026 — The S&P 500 posted its biggest weekly drop since June, dragged down by a swoon in heavyweight tech and AI stocks. Investor confidence in the market is wavering due to recent declines in AI-linked stocks and semiconductor firms. The bottom line is clear: the market is no longer buying the story of infinite growth without scrutiny.
Debt Takes Center Stage
By the numbers, the concern is specific. CoreWeave, an AI cloud company with about $50 billion in debt, saw its shares tumble recently. Simultaneously, credit default swaps for the firm surged. Investors are watching risks tied to the financing of the AI build-out boom with heightened intensity.
Dan Greenhaus, a strategist at Solus Alternative Asset Management, noted that CoreWeave’s unsecured debt has been especially targeted. He described the situation as “the riskier of the riskier AI buildout play.” This sentiment reflects a broader shift in how Wall Street views the capital structure of AI firms. The focus has moved from pure revenue potential to the sustainability of balance sheets.
Borrowing costs have jumped significantly. The Iran war and rising oil prices sent bond yields to the highest levels in more than 20 years. Additionally, the Federal Reserve is hiking rates again to rein in stubborn inflation. These macroeconomic pressures put more scrutiny on the riskier areas of the AI boom, which has grown increasingly reliant on issuing debt via the bond market.
The Hyperscaler Spending Race
The figure that matters here is $1.2 trillion. According to Goldman Sachs, five AI hyperscalers are expected to increase their capital spending to this amount next year. Meta Platforms is one of these key players. Its market capitalization stands at about $1.8 trillion. Investors will note that massive outlays on AI data centers and infrastructure underpin the expected profit jump in the sector.
S&P 500 companies are expected to have increased earnings by more than 30% in the third quarter, according to LSEG IBES. This growth is largely underpinned by the massive infrastructure buildout. However, the question remains whether this spending will yield sufficient returns. Kevin Shea, a senior equity analyst at BNY Wealth, stated that one of the most important takeaways of earnings season is whether the profitability of the hyperscalers can grow faster than the pace of their capex.
Investors are eager for signs that these companies can show returns on their investments. Such evidence would build confidence that the spending is sustainable. Without it, the narrative of perpetual growth may face serious headwinds.
Market Sentiment and Analyst Warnings
Strategists at Deutsche Bank and RBC Capital Markets separately pulled back on their recommendations of the tech sector in October. On October 9, Deutsche Bank strategists said the rotation into tech had “run far and the risk-reward no longer looks favorable in the near term.” This marks a notable shift in institutional positioning.
Garrett Melson, a portfolio strategist with Natixis Investment Managers Solutions, observed that the narrative in the market is “a little bit jittery.” He noted that there is a lot of uncertainty around where AI stands right now. The S&P 500 benchmark index was only about 2% below its record high set this month. Other sectors, which lagged as tech shined last month, posted solid gains on the week, including healthcare and consumer staples.
Melson described the market as “very much an on-off switch type of market.” He explained that when AI is working, it “sucks all the oxygen out of the room for the rest of the sectors.” This dynamic suggests that the market is highly sensitive to any negative news regarding the AI sector.
Historical Context and Future Outlook
Since the advent of OpenAI’s ChatGPT in late 2022, the list of possible indicators that the AI boom was about to go bust has been long. Whenever AI chip giant Nvidia saw its market cap cross major milestones, bears sounded the alarm. The borrowing binge by AI hyperscalers and their astronomical capital spending plans raised more red flags.
The DeepSeek shock in early 2025 triggered another wave of concern as the Chinese AI model stirred doubts about the necessity of all that capex. Also last year, OpenAI CEO Sam Altman’s admission that an AI bubble exists and Michael Burry’s bearish bets represented more red flags. This year, the Iran war, the South Korean stock market’s meltdown, and “circular” funding deals between AI companies added to the fears.
Despite these warnings, earnings continued to soar, and stocks eventually rebounded to set record high after record high. Greenhaus pointed out that CoreWeave’s unsecured debt has been especially targeted, but he also noted that earnings from AI chip suppliers like Taiwan Semiconductor indicate the broader demand environment remains robust. He does not expect companies across the AI ecosystem will be able to keep financing themselves indefinitely as rates go higher. The debate continues over whether the latest AI bubble warnings are another head fake or the real thing.
Sources
- 'How many canaries have we killed in the coal mine?' — Wall Street debates if the latest AI bubble warnings are another head fake or the real thing | Fortune
- Wall Street Week Ahead: As AI rally wobbles, stock market's spotlight turns to earnings – The Economic Times
- Intercos (BIT:ICOS) On Its Asia Expansion Story And The Case For Undervaluation
Photo: Mike Roberts from New York City, USA / wikimedia (CC BY 2.0)
