AI Credit Crunch?
Ed Yardeni chimes in after my October 8 post AI Capital Crunch?
(…) Does enough capital even exist to finance everyone’s ambitious AI spending plans?
Meta’s earnings announcement on Wednesday brought these concerns to the fore. Despite revenues rising 26% y/y to $64.6 billion, the company reported negative free cash flow of $2.1 billion. It raised the lower end of its 2026 capital expenditure guidance to $135–$145 billion and announced a new class of non-voting shares to facilitate future capital raising. Investors interpreted the move as a sign that even hyperscalers may be rushing to secure financing before competitors absorb the available capital.
Indeed, the Meta report stated: “Recent significant capital raises from peers like Alphabet and SpaceX, alongside anticipated fundraising from Anthropic and OpenAI, have created an increasingly challenging fundraising environment.”
Several industry leaders have confirmed this concern. Broadcom CEO Hock Tan recently warned that capital could become the biggest constraint on AI development. BlackRock CEO Larry Fink said that competition for capital was the fiercest he had witnessed in his career. On Thursday, Nvidia CEO Jensen Huang warned that neocloud demand is “off the charts” but capital is scarce.
As AI companies compete for capital, rising financing costs increase the returns required to justify investments, amplifying the original worry about whether all that spending will pay off. Today’s market action showed how these concerns are playing out across stock and bond markets:
Meta’s shares plunged 7.0% today after yesterday’s announcement, leading a broad selloff in AI-related stocks. Nvidia fell 4.4%, CoreWeave fell 10.1%, and Lam Research fell 11.8%. SOXX dropped 6.8%.
The Nasdaq dropped 2.6%, its worst day in four months. (…)
The 10-year Treasury yield fell below 5.00% for the first time in nearly a month, returning to what we consider its old-normal range of 4.00%–5.00% (chart). The Treasury market rally suggests that investors are increasingly concerned that tightening access to capital could slow the AI buildout, one of the economy’s most important growth engines. (…)
We view market-driven tightening access to capital as healthy for the AI boom, resulting in more efficient capital allocation and reducing over-investment risks.
Importantly, we expect the key players to retain financing access. The five major hyperscalers (Amazon, Alphabet, Meta, Microsoft, and Oracle) alone are projected to spend almost $780 billion in 2026. Over each of the following four years, from 2027 through 2030, that figure is expected to exceed $1 trillion annually. Their strong cash flows, balance sheets, and market access should allow them to continue investing in AI.
So, Treasury investors’ wish of an AI-led slowdown is only wishful thinking and AI financing will keep crowding out other borrowers, including the US of A.
Treasury secretary Scott Bessent told investors in a private meeting that he did not see a “systemic problem” with the AI boom, downplaying concerns that the industry is in a bubble like the one that preceded the dotcom bust. (…)
“I’m good at figuring out when there are problems in systems,” Bessent, a former macro hedge fund manager, said when asked about AI in an interview with Bridgewater chief executive Nir Bar Dea, according to three people who were present at the event.
“I don’t see a systemic problem.” (…)
Here’s where there might be a problem:
Firms rated Caa and below face $27 billion in debt maturities over the next year and $91 billion by fall 2028, the rating agency warned Tuesday.
At this time in 2025, one- and two-year figures were $23 billion and $42 billion, respectively.
That low-rated cohort now accounts for one-third of all sub investment-grade maturities next year and more than 25% of the 2028 total. By way of context, triple-C-rated credits compose only 8.5% of the high-yield market, data from Janus Henderson show. (ADG)
Refinancing is now done at 7%+, a huge hit for borrowings made pre-2023.
Source: Topdown Charts Research Services
Meanwhile, Ed continues:
Another development amplifying risk-off sentiment today was escalating geopolitical tensions in the Middle East. The New York Times reported that the US and Israel have developed plans for possible renewed strikes against Iran following the November 3 midterm elections.
Meanwhile, intensifying Houthi attacks on Saudi infrastructure prompted the US to order nonessential diplomatic personnel and their families to leave Saudi Arabia, while Saudi Aramco evacuated staff from its Dhahran headquarters.
The price of Brent crude oil jumped to $113.17 per barrel Thursday, while West Texas Intermediate crude rose to $103.95. (…)
Prices remain elevated partly because of higher shipping costs, but more importantly because of a geopolitical risk premium (…).
BTW: US is prepared for long stand-off with Iran, says Trump envoy
Mike Waltz, Donald Trump’s ambassador to the UN, acknowledged that a year from now the US could still be mired in a stalemate with Iran, without a deal on Tehran’s nuclear programme or a return to prewar shipping through the Strait of Hormuz. (…)
But “the president and the US Navy can maintain this blockade [on Iranian ports] for the foreseeable future,” he said, and the administration is “tightening” its economic pressure campaign. (…)
Waltz said the US will not have accomplished its strategic objectives in the conflict until it has disposed of Iran’s highly enriched nuclear material and reached a “meaningful agreement on their domestic enrichment” with Tehran. (…)
Iran’s Islamic Revolutionary Guard Corps Navy said on Thursday that four vessels involved in illegal oil transfers in the northern Persian Gulf were simultaneously hit and caught fire after being tracked by its forces on Wednesday.
The IRGC added that three more vessels collided with mines west of the Strait of Hormuz, and warned the US military that continued provocations could lead to a wider response against its regional bases.
There is also a Term Premium on oil prices. Back to Ed:
The bottom line is that the Middle East conflict remains a wild card. However, we expect US consumer spending and business investment to remain robust, while federal deficits of roughly 6% of GDP (during a solid economic expansion) provide additional economic stimulus.
We expect the US economy will continue to pass the latest stress tests originating in the AI ecosystem and in the Middle East.
But more than half of the 6% deficit is now interest expense. What’s the multiplier on that?
Data: Office of Management and Budget via FRED, U.S. Treasury. (2026 GDP estimated using extrapolated Q3 growth.) Chart: Emily Peck/Axios
FLASH PMIs
Eurozone: October sees softer expansion in eurozone output
- Flash Eurozone PMI Composite Output Index: 51.9 (September: 53.1). 4-month low.
- Flash Eurozone Services PMI Business Activity Index: 51.7 (September: 53.0). 2-month low.
- Flash Eurozone Manufacturing Output Index: 52.4 (September: 53.6). 4-month low.
- Flash Eurozone Manufacturing PMI: 52.4 (September: 52.9). 3-month low.
Matching the trend for business activity, new orders increased at the slowest pace in the current four-month sequence of expansion at the start of the final quarter of the year. Here, the rate of growth was only slight as both monitored sectors saw only modest improvements in new business.
While the rate of expansion in new export orders (which include intra-eurozone trade) also eased, an increase was recorded for the third consecutive month, an improved
picture following a period of amost four-and-a-half years
in which new export business had fallen continuously on a monthly basis. In fact, the latest rise in new export orders. (…)Manufacturers efforts to secure inputs were hampered by ongoing disruption to supply chains. Supplier lead times lengthened markedly, and to the largest degree in four months.
Manufacturers reported a sharp and accelerated increase in input prices in October, often linked by respondents to higher costs for energy, fuel and transportation. The latest rise was the steepest since May and above the average for the year-to-date.
The strength of the rise in manufacturing input prices meant that input cost inflation overall quickened for the second month running despite a slower rise in services input prices.
In contrast to the trend in input costs, the rate of output price inflation slowed in October. Both Germany and France posted weaker increases in selling prices than in September, but the rest of the eurozone as a whole saw the rate of inflation accelerate.
Japan: Business activity rises solidly again in October
- Flash Japan Composite PMI Output Index: 52.3 (September: 52.3)
- Flash Japan Services PMI Business Activity Index: 52.0 (September: 51.3)
- Flash Japan Manufacturing PMI: 53.3 (September: 54.1)
- Flash Japan Manufacturing PMI Output Index: 53.1 (September: 54.9)
Demand conditions softened across Japan during October, with new business at the composite level rising to the smallest extent in three months. Sales growth in the service sector rose at a steeper, yet still modest pace, but goods producers recorded the slowest rise in new orders since March.
External demand conditions also remained positive, though new export business rose at the softest rate in four months.
The rate of input cost inflation across Japan’s private sector accelerated slightly in October, and was marked overall. Firms frequently mentioned that higher raw material and labour costs were sources of inflation at the start of the fourth quarter.
Companies raised their output charges sharply again in October in response, though the rate of inflation eased to a four-month low.
US Treasury proposes tighter rules on investing in sensitive Chinese tech Restrictions would apply to investments in areas including AI, hypersonic weapons and biotech
US companies and investors would face tighter restrictions on investing in sensitive areas in China from AI and hypersonic weapons to biotech under proposed rules unveiled by the Trump administration.
The Treasury on Thursday published regulations implementing the Comprehensive Outbound Investment National Security Act, which Congress passed in 2025 to boost scrutiny of investment in China and other adversaries including Iran and Russia to protect American national security.
The proposed regulations would impact investments in advanced chips and AI. They would also target a range of biotech-related compounds and materials and technology such as brain-computer interfaces. (…)
Craig Singleton, an expert on US-China competition at the Foundation for Defense of Democracies, said the proposed regulations for biotechnology were the most significant element of the package released by Treasury. “
Biotech matters to both Wall Street and Main Street,” he said. “It shapes the future of medicines and therapeutics, but some of the same technologies can also strengthen China’s military capabilities or deepen US dependence on Chinese supply chains.”
He added: “Treasury is putting investors on notice that money flowing into parts of China’s biotech sector carries national security consequences and will face much closer scrutiny.” (…)
The proposal sets up a lobbying fight between the administration and the US biotech sector, which has increasingly turned to China for early drug development. (…)
However, the regulations spare certain deals that US pharmaceutical companies have done in China. Eli Lilly, Pfizer, Bristol Myers Squibb and other US companies have paid billions of dollars to Chinese drugmakers to license their new medicines.
These licensing deals avoid the regulations if they were paid in cash without an equity investment, said Will Humphrey, a vice-president at Capstone, a healthcare policy and consulting firm.