Markets Steady After CoreWeave Shock, But AI Debt Worries Linger

Global equity markets steadied on Friday, with bargain hunters likely leading the buying after a precipitous plunge in the previous session, but distress in CoreWeave's bonds kept a lingering question over the debt-funded construction of AI infrastructure.

South Korea's KOSPI rose around 3% following Thursday's nearly 8% drop, while Japan's tech-heavy Nikkei gained 1.5% after falling about 5%, according to a Morning Bid market note carried by wkzo.com. US and European stock futures also edged higher early, the note said.

The calmer tone did not hold in New York. The Nasdaq Composite tumbled 573 points, or 2.1%, to 26,140 — its worst week since June — while the S&P 500 fell 1.1% and the Dow Jones Industrial Average slipped 0.3%, CBS News reported. Chipmakers were hit hardest, with Micron Technology down 5.6%, Advanced Micro Devices down 6%, Broadcom off 4.5% and Intel losing 5.8%, according to CBS News.

At the center of the storm is CoreWeave. Bonds the data-center operator issued in June at a yield of 9.675% have plunged in value, pushing their yield to 15% this week, according to a Reuters report carried by The Star. The move has raised the stakes for investors weighing whether to keep financing a buildout that may take years to generate revenue.

"CoreWeave is absolutely the canary in the coal mine" for a market segment coming under more stress, Max Frumes, global head of distressed and leveraged finance at 9fin, told Reuters. "This is going to be a turning point in the pricing and availability and structure of credit that's supporting the AI boom," he said, predicting other AI-linked debt will follow CoreWeave into distressed territory.

Neocloud providers such as CoreWeave have been particularly hard hit because they are financing much of their capital spending through debt and equity issuance rather than cash flow, market analyst Adam Crisafulli of Vital Knowledge told CBS News. CoreWeave shares fell 15.1% from Monday's open through Thursday's close despite a 6% gain Thursday after a vote of confidence from partner Nvidia, the Reuters dispatch reported. CBS News reported the stock slid nearly 12% on Friday and was down roughly 24% on the week.

Credit investors said the selloff is forcing a reassessment of AI-related exposure. "We're definitely taking another look at our exposures across the AI infrastructure space, particularly where the risks are concentrated and whether we're being adequately compensated for taking them," John Han of F/m Investments said in the Reuters report carried by The Star. In the same report, Larry Holzenthaler of Catalyst funds said the market is "being very selective and really singling out anything that has more leverage," describing the shift from overly upbeat to bearish as an overreaction to risks that were overlooked or downplayed in June.

Deutsche Bank's Jim Reid said the market is entering a phase in which debt financing matters more. "As we move to a capex cycle funded out of debt rather than simply free cash flow, we have to increasingly respect the credit price action," he wrote, adding that "AI financing costs aren't dramatic overall, but there are worrying themes at the edges." Vanguard bond portfolio manager Brad Collins said assessing AI-related debt has become more challenging as issuers bring increasingly large and varied offerings, often forcing investors to make decisions in days or hours. Dan Ives of Yorkville Ives estimates 5% to 10% of planned AI projects ultimately will not be built, citing "growing noise around data center permitting and midterm rhetoric on power prices."

Inflation added to the pressure. Fresh signs that US price pressures are moving further away from the Federal Reserve's 2% target rattled investors this week, CBS News reported.