Tech stocks tumble amid AI debt fears and inflation concerns

Financial markets slumped on Friday as investors sold off technology stocks amid concerns that companies exposed to artificial intelligence are starting to wobble. The tech-heavy Nasdaq Composite tumbled 573 points, or 2.1%, to end at 26,140, closing out its worst week since June. The broader S&P 500 and blue-chip Dow Industrial Average sank 1.1% and 0.3%, respectively.

AI Debt Concerns Hit Chipmakers

Chipmakers and other tech companies have been under pressure this week as investors worry about the heavy borrowing associated with the emergence of AI and the rapid buildout of thousands of data centers required to provide computing power for AI models. So-called neocloud companies like CoreWeave, which provide the brute computing power AI models need to function, were particularly hard hit. That's because they are financing much of their capital expenditures through debt and equity issuance rather than cash flow, raising investor concerns about mounting debt, market analyst Adam Crisafulli, head of Vital Knowledge, told CBS News.

Shares of CoreWeave slid nearly 12% on Friday and dropped roughly 24% this week as investors nervously eye its mounting debt. Micron Technology fell 5.6%, Advanced Micro Devices dropped 6%, Broadcom was down 4.5% and Intel lost 5.8%. The downturn also came amid concern about whether the AI company Anthropic, soon set to go public, will be able to maintain its revenue momentum, Crisafulli said in a note to investors. Anthropic investors are now considering valuing the company at $1.5 trillion, down from the original target of $2 trillion, Reuters reported on Thursday.

Inflation Data Rattles Global Markets

Also rattling investors this week were fresh signs that U.S. inflation is increasing and moving further away from the Federal Reserve's 2% annual target. U.S. data on Wednesday showed stateside inflation jumped to a higher-than-expected 3.7% in September, marking the fastest increase in prices since the consumer price index (CPI) rate hit a three-year peak of 4.2% in May. Fresh data on Thursday showing U.S. producers increased their prices by 6.3% year on year in September – the sharpest rise since December 2022 – added to inflationary jitters.

Yields on the 10-year U.S. Treasury bonds held steady at 5.1% on Friday. Earlier this month, bond yields surged to their highest level in more than two decades amid concerns over inflation and rising U.S. government debt. The hot inflation readings this week could spur the Federal Reserve to raise interest rates at its next meeting on Oct. 28-29, according to some economists. For now, most Wall Street traders expect the central bank to keep its short-term rate unchanged, but the 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.

Global Sell-Off Intensifies

The sell-off extended to Asian markets, where South Korea’s benchmark Kospi 200 index fell more than 8% overnight to a six-month closing low, triggering circuit breakers that brought trading to a halt at various points. Semiconductor stocks such as SK Hynix and Samsung Electronics plunged nearly 11% and 9.5% respectively. Japan’s Nikkei 225 dropped by 4.9% on Thursday, after an 11% slump in the memory chip maker Kioxia and a 10% drop in SoftBank, a big investor in the ChatGPT owner, OpenAI.

The International Monetary Fund said this week that the threat of an AI share price crash rippling out across global markets was putting world financial stability at risk. “The consequences of an AI correction could be global,” the IMF said. Aside from the US, Asian markets would be most exposed, with the UK and eurozone potentially more insulated – although investors with US holdings would be hit.

Why it matters

The simultaneous decline in tech stocks and rise in inflation has heightened market volatility. Investors are weighing the risks of high debt levels in AI infrastructure companies against the potential for further interest rate hikes by the Federal Reserve. The IMF's warning underscores the potential for broader financial instability if the AI sector corrects sharply.

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Sources

• cbsnews.com: Tech stocks tumble as AI debt fears rattle Wall Street - CBS News
• theguardian.com: Tech market sell-off deepens amid fears over US inflation and AI debt | Stock markets | The Guardian

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