Markets Stabilize After AI Selloff, but CoreWeave Debt Shock Rattles Confidence in AI Financing

Asian markets recovered some of Thursday’s steep losses on Friday, with South Korea’s KOSPI rising about 3% after an nearly 8% plunge and Japan’s tech-heavy Nikkei gaining 1.5% following a 5% drop. US and European stock futures also edged higher as calm returned after a frenzied session driven by AI-related selling.

The reprieve, however, masks growing unease about the financing underpinning the AI boom. The catalyst for Thursday’s turmoil was a spike in yields on bonds issued by CoreWeave, a specialized cloud provider that finances much of its massive GPU purchases through debt. CoreWeave bonds issued in June at a yield of 9.675% have plunged, sending the yield to 15% this week, according to analysts and portfolio managers cited by Reuters. Another CoreWeave bond maturing in 2032 reached a yield of 14.8%, according to a Jefferies research report.

“CoreWeave is absolutely the canary in the coal mine,” said Max Frumes, global head of distressed and leveraged finance at 9fin. “This is going to be a turning point in the pricing and availability and structure of credit that’s supporting the AI boom.”

Credit default swaps for CoreWeave surged from 749 basis points on September 11 to 1,118 bps in the same period, Jefferies reported. Oracle’s five-year CDS spread also widened sharply, from 186 bps to 288 bps. The Jefferies report, titled “K-shaped stresses, AI tremors and the Houthis,” said these are the highest credit risk levels seen since the AI capex cycle began in early 2023. The firm’s Christopher Wood urged investors to remain “laser focused on credit spreads for any evidence that the market is no longer willing to fund the ongoing AI capex boom.”

CoreWeave shares fell 15.1% from Monday’s open through Thursday’s close, according to Reuters, despite a 6% gain Thursday after a vote of confidence from partner Nvidia. On Friday, shares slid another 12%, according to a CBS News report, bringing the weekly decline to about 24%. The broader technology rout deepened Friday, with the Nasdaq Composite tumbling 573 points, or 2.1%, closing out its worst week since June. The S&P 500 fell 1.1% and the Dow Jones Industrial Average lost 0.3%. Chipmakers were hit hard: Micron Technology fell 5.6%, Advanced Micro Devices dropped 6%, Broadcom lost 4.5% and Intel fell 5.8%.

The selloff has spread to other so-called neocloud providers, including Nebius and Iren. Investors are reassessing risks that were overlooked just months ago—the sheer size of funding needs, reliance on outside financing, and the possibility that GPUs purchased for data centers could become obsolete before facilities open.

“A few months ago, I would have said people were just too optimistic around AI,” said Larry Holzenthaler, senior portfolio manager of fixed income at Catalyst Funds, who described the current selloff as an overreaction as sentiment shifts from overly upbeat to bearish. “The market is being very selective and really singling out anything that has more leverage.”

Deutsche Bank global head of macro and thematic research Jim Reid noted the market is entering a new phase where debt financing is increasingly important. “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,” Reid wrote in a recent report. “AI financing costs aren’t dramatic overall, but there are worrying themes at the edges.”

Inflation is compounding the pressure. US 10-year Treasury yields held at 5.1% on Friday after surging to their highest in two decades earlier this month. Fresh inflation readings have stoked concerns that the Federal Reserve may need to raise rates further. Odds of a rate hike at the Fed’s December meeting have jumped to 74.3% from 50.2% a month ago, according to CME FedWatch data cited by CBS. Markets currently see about 28% odds for a rate hike at the Fed’s Oct. 28-29 meeting.

Fed Chair Kevin Warsh, speaking at IMF/World Bank meetings in Bangkok on Friday, offered no policy hints, repeatedly stating he does not prejudge the outcome of meetings, as reported by Reuters. Bank of England Governor Andrew Bailey said soaring energy prices due to the Iran war have so far had limited impact on UK inflation, but it was too soon to draw firm conclusions.

Jefferies also flagged slowing earnings growth momentum for AI stocks. Citing a separate report, it said consensus earnings growth for global AI stocks is expected to moderate from around 100% in 2026 to 30% in 2027 and 22% in 2028. Global AI stocks currently trade at 23 times forward earnings, compared with 13 times for non-AI stocks.

Vanguard bond portfolio manager Brad Collins said assessing AI-related debt has become more challenging as issuers bring increasingly large and varied offerings to market, often forcing decisions in days or even hours. Dan Ives, partner and technology analyst at Yorkville Ives, estimated that 5% to 10% of planned data center projects ultimately will not be built, citing "growing noise around data center permitting and midterm rhetoric on power prices."

Some investors see the correction as healthy, but the consensus is that volatility will stay elevated. With tech earnings rolling out in the coming weeks and rate decisions pending, the question is how long the calm after Thursday’s shock can last.