AI trade faces growing credit risk as debt fuels expansion

Artificial intelligence stocks face growing credit risk as debt becomes the primary funding source for AI expansion, threatening the sector's previously reliable performance. U.S. equity markets fell last week after concerns emerged over CoreWeave's heavy borrowing, with its stock plunging 25%. Nvidia CEO Jensen Huang told CNBC that capital scarcity is holding back AI growth, while economist Dario Perkins warns AI companies may issue around $700 billion in new bonds in 2027 alone, exceeding all euro-area government issuance. The Federal Reserve may hike rates in December, potentially raising borrowing costs further. Despite these concerns, business fundamentals remain solid, with Meta reporting 26% revenue growth and Magnificent Seven earnings expected up 33% year-over-year. Investors now question whether AI companies can justify their rapidly growing debt burden.