Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How AI Spending Is Creating a Credit Risk Underneath the Bull Market
Transcript
- Lucas: So the S&P 500 is trading just above 7,400, the Dow is above 51,900, the Nasdaq near 25,000 — all very close to their all-time highs. And yet this week Moody's put out a report warning that 'unprecedented' AI capital spending is threatening the credit quality of some of the biggest names in tech. Luna: That's a pretty stark disconnect. They're basically saying the companies driving this bull market might be taking on too much debt to fuel the AI arms race. Lucas: Exactly. Moody's estimate is that Amazon, Meta, Alphabet, and a handful of others will collectively spend well over $200 billion on AI infrastructure this year alone. Think data centers, GPUs, custom chips, energy contracts. That's more than double what they spent two years ago. Luna: And Moody's specifically called out that this spending is 'unprecedented' and could pressure their credit ratings if it doesn't generate returns quickly enough. Lucas: Right. The market is pricing in that AI will deliver massive future revenue and earnings. But from a credit perspective, these companies are burning cash and increasing leverage. Amazon's debt has grown significantly; Alphabet issued $10 billion in bonds just last quarter. If the payoff takes longer than expected, you could see downgrades. Luna: Yet their stocks are at or near highs. So the equity market is completely ignoring the credit signal? Lucas: For now, yes. The narrative is that these companies have pricing power, massive moats, and that AI is the next platform shift. But credit rating agencies look at different metrics — free cash flow coverage, interest coverage, the ability to service debt in a downturn. And those metrics are weakening. Lucas: Look, if today's conversation helped you think about this tension between stock momentum and bond market reality, honestly, if it was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Just a small way to keep the show ad-free and independent. Luna: Yeah, it's a tiny gesture that makes a big difference for us. And we really appreciate the listeners who do. Lucas: So back to the credit picture — Moody's isn't the only one sounding cautious. The Fed is another layer. Oil prices have been ripping higher this month, and that's pushed up odds of a rate hike at the September FOMC meeting. Luna: Right, I saw that. The probability of a quarter-point hike jumped above 40% this week, which is pretty significant given the Fed had been on hold. Lucas: And higher rates mean higher borrowing costs for everyone, including these big tech firms. Their floating-rate debt becomes more expensive, and new bond issuance gets costlier. That magnifies the credit risk Moody's is flagging. Luna: So you have a triple threat: massive AI capex, potential rate hikes, and still-elevated inflation. Why isn't the bull market flinching? Lucas: Because the equity market is forward-looking on revenue, not on debt service. The AI story is so compelling that investors are willing to overlook near-term leverage. They assume these companies will grow into their debt. But credit markets are more skeptical — you can see it in CDS spreads widening for some of these names. Luna: Which one is right? I mean, historically, when credit and equity diverge this much, something usually gives. Lucas: That's the million-dollar question. The bull market is betting that AI is a once-in-a-generation opportunity, and the spending is necessary to capture it. The credit analysts are betting that the spending is reckless and the payoff may not materialize fast enough. Both could be right for a while, but eventually the numbers have to line up. Luna: What would be the trigger that forces the market to reprice that risk? Lucas: A few possibilities. One, a major company like Amazon or Meta gets put on negative watch by Moody's or S&P. Two, actual earnings disappoint — we saw some mixed results this quarter from cloud providers. Three, the Fed actually hikes and we get a sharp sell-off in growth stocks, which then feeds into tighter credit conditions. Luna: So it's not a crash scenario, more of a gradual repricing. Lucas: Right. The bull market isn't going to end overnight because of a Moody's report. But it does add a layer of risk that investors should be aware of. If you're long big tech, you're essentially making a bet that AI's revenue ramp is fast enough to offset both the debt load and any rate headwinds. Luna: And the Russell 2000 is actually down a bit this week, so the small-cap side of the market is already showing some weakness. That might be the canary. Lucas: Could be. The narrowness of this bull market is a recurring theme. The S&P 500 is being lifted by a handful of mega-cap tech names, while the rest of the market is lagging. If those leaders stumble, there's not much underneath to catch the fall. Luna: So what's your takeaway for someone listening right now? Lucas: Pay attention to the credit market signals. Don't just look at stock prices. Watch the bond yields of these companies, watch for rating actions. If the spread between corporate bonds and Treasuries starts widening significantly, that's a red flag. For now, the bull market is intact, but the foundation is getting a little shakier. Luna: And maybe ask yourself: am I comfortable owning these names if Moody's downgrades them? Lucas: Exactly. The AI thesis is compelling, but leverage is a silent risk that often only shows up when the music stops. Something to keep in mind as we head into August.