Stocks slide as AI debt fears and oil surge hit markets

US stocks declined on Friday, led by the technology sector, as investors weighed concerns about debt in the artificial intelligence (AI) sector against a sharp rise in oil prices. The Nasdaq Composite fell 2%, the S&P 500 dropped 1%, and the Dow Jones Industrial Average slipped 0.6%. All three major averages had closed higher on Thursday.

AI Debt Concerns Weigh on Tech

The sell-off was driven by scrutiny of "neocloud" companies, which rent computing power for AI development. CoreWeave (CRWV), a Nvidia-backed provider, saw its shares fall 13% amid worries about its debt-heavy balance sheet. The stock had rebounded on Thursday after Nvidia CEO Jensen Huang expressed optimism about the company, but the gains were short-lived.

Gil Luria, head of technology research at D.A. Davidson, told CNN that CoreWeave represents a "subprime tranche of the AI trade" due to concerns about its ability to pay down debt. "It’s unclear that (CoreWeave is) going to get a sufficiently good return to pay down the debt that they borrowed," Luria said.

Despite the volatility, Bank of America analysts led by Vivek Arya argued that the AI trade remains "resilient." They pointed to high utilization rates of deployed AI infrastructure, which they said run near 100%, and rising GPU rental rates. "A sign of scarcity, not glut," the analysts wrote regarding the rental rate increases.

Oil Prices Surge Amid Geopolitical Tensions

Oil prices climbed significantly as geopolitical tensions escalated in the Middle East. Brent crude touched $110 per barrel for the first time since May, while West Texas Intermediate crude neared $100. The rise in oil prices added to inflation concerns, with the Cboe Volatility Index (VIX) surging more than 22% to reach 22.31 intraday.

The conflict in the Strait of Hormuz has disrupted oil flows, with multiple tankers and container ships affected this week. The Washington Institute has tracked more than two dozen attacks in the region since the start of the month.

Semiconductor Sector Struggles

Semiconductor stocks also faced pressure, with the PHLX Semiconductor Index dropping 3.59%. The sector has been a key driver of the AI trade but has struggled this week due to concerns about rising costs and competition from Chinese memory chipmaker CXMT, which announced progress on advanced memory chips.

Thomas Martin, portfolio manager at Globalt Investments, noted the market's reaction to these developments. "The market sells first, asks questions later," Martin said. "That’s why you get the volatility."

Why it matters

The simultaneous decline in tech stocks and rise in oil prices highlights the complex challenges facing investors. Concerns about the sustainability of AI infrastructure spending, particularly among debt-heavy companies, are colliding with inflationary pressures from energy markets. The volatility in the VIX and the rotation into defensive sectors like Health Care suggest investors are seeking safety amid these uncertainties.

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Sources

• finance.yahoo.com: Stock market today: Nasdaq, S&P 500, Dow fall as tech stocks slide, oil climbs to $110
• cnn.com: Nasdaq sinks more than 2% as investors raise questions about AI debt | CNN Business
• cnbc.com: Wall Street's fear gauge is ripping. Traders see it going even higher

This article was drafted with AI assistance and checked against the sources above. Company claims are reported as claims. Cover image is AI-generated.