Credit default swap (CDS) costs for many of the largest Big Tech firms, including Meta, Oracle, Nvidia, and Amazon, are reaching multi-year and, in some cases, record highs. The speed and magnitude of this increase are notable, reflecting investor unease about the mounting debt these companies are taking on to fund their intense AI spending.
While some of these companies only recently began accumulating debt, and despite their robust cash generation (Microsoft, for example, holds a triple-A credit rating, surpassing that of the U.S. federal government), the surge in CDS prices suggests that traders believe AI capital expenditure is nearing "bubble territory." However, the overall market remains resilient, with the Dow less than 1% from its record high and the S&P 500 only 2% away from its peak, largely due to a rotation into sectors like financials, healthcare, industrials, consumer staples, utilities, and materials, which are performing strongly.
The U.S. semiconductor index, in contrast, is in a bear market, down 25% from its June 22 high. This divergence in performance comes as oil prices plunged over 5% following a de-escalation in U.S.-Iran hostilities, easing inflation concerns ahead of key Federal Reserve decisions and upcoming tech earnings. Despite the sector-specific weakness, especially in megacap tech names that previously fueled Wall Street's rally, the broader market has been sustained by gains in other sectors and positive catalysts such as solid second-quarter earnings and a rebound in U.S. economic forecasts.
