Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Moodys AI Spending Warning Threatens Credit Quality of Big Tech
Transcript
- Lucas: Moody's dropped a warning this week that feels like a canary in the coal mine for anyone who owns big tech bonds — or stocks, for that matter. Luna: I saw that. They said AI spending by Amazon, Meta, and Alphabet is becoming 'unprecedented' and starting to threaten their credit quality. Lucas: Exactly. And let's put numbers on it. These three companies alone are on track to spend nearly two hundred billion dollars on capex this year — most of it on AI data centers, chips, and infrastructure. That's a roughly forty percent increase from last year. Luna: So Moody's is basically saying the spending is outstripping the revenue generation from AI so far. What's the specific metric they're flagging? Lucas: They're looking at debt to ebitda, free cash flow coverage, and the rate of return on invested capital. For Amazon, debt has climbed to around one hundred and sixty billion dollars. Meta and Alphabet are in better shape debt-wise, but their capex as a percentage of revenue is above twenty percent — way above the historical average for investment-grade companies. Luna: And when you add in that the ten-year Treasury is yielding almost four point seven percent, the cost of carrying that debt is a lot higher than it was two years ago. Lucas: Right. So the bar for earning a return on that AI spend just got higher. If the AI payoff is delayed or disappoints, these companies could see their credit ratings downgraded — which would increase their borrowing costs further, pressure margins, and hit equity valuations. Luna: If this kind of analysis helps you think about your portfolio differently, that's exactly why we do this show. And the reason we can keep it ad-free is listener support — you can contribute at buy me a coffee dot com slash fexingo. Lucas: Yeah, every bit helps us stay independent and dig into stories like this without any outside influence. So back to the Moody's report — they specifically highlighted that Amazon's credit metrics have weakened more than expected. Luna: What about the broader bond market? The thirty-year Treasury is at five point one seven percent. That makes all corporate debt look more risky by comparison. Lucas: Yes, and that's the macro backdrop Moody's is layering in. With the yield curve un-inverting — the ten-year is now thirty-six basis points above the two-year — the market is signaling higher growth expectations, but also higher inflation and term premium. For highly indebted companies, that's a triple threat. Luna: And oil prices ripping higher only adds to inflation fears. I saw that the odds of a Fed rate hike surged this week. Lucas: Exactly. The VIX at eighteen point five eight and the VVIX above a hundred show the options market is pricing in more volatility, not less. If the Fed has to hike, that would hit growth stocks — especially the ones with stretched balance sheets. Luna: So the Moody's warning might be the canary, but the coal mine is the whole growth-stock complex that's been driving the S&P 500 to all-time highs. The S&P is at seven thousand four hundred twelve. Lucas: Right. That index is heavily concentrated in these mega-cap tech names. If Amazon or Alphabet face a credit downgrade, the ripple effects could be significant — higher volatility, sector rotation, maybe a shift toward value and defensives. Luna: Have any of these companies responded to Moody's? Lucas: Not publicly. But internally, they're all doubling down on AI because they see it as existential. The tension is that the market is rewarding them for spending aggressively — their stocks are up — but the credit market is starting to penalize them. That divergence can't last forever. Luna: So for the individual investor, what's the takeaway? Should we be worried about holding these stocks? Lucas: Not panicked, but aware. If you own individual bonds of these companies, pay attention to the debt to ebitda trend. If you own the stocks, understand that the AI narrative has priced in a lot of future success. Any sign that the payoff is slower or more expensive than expected could trigger a repricing. Luna: And the broader market implication — if mega-cap tech stumbles, the S&P 500 becomes a lot less resilient. Lucas: Exactly. That's why this Moody's report matters beyond just credit analysts. It's a fundamental check on the AI euphoria that's been propping up the market. We'll be watching the earnings calls next month to see if CFOs start talking about capex discipline.