On Thursday, Wall Street witnessed a new wave of selling in shares of artificial intelligence companies, following widespread fluctuations in global markets that raised concerns about the sustainability of the artificial intelligence “fever.”
The Standard & Poor's 500 index fell by 0.5 percent, recording a decline for the sixth time in the seven days that followed its arrival at a record level. The weakness of artificial intelligence stocks led to the Nasdaq Composite Index falling by 1.2 percent, recording the largest loss among the major indices, while other sectors of the stock market showed greater resilience. At 9:35 am EST, the Dow Jones Industrial Average rose by 251 points, or 0.5 percent, and the majority of US stocks recorded gains.
These fluctuations coincided with the issuance of a report that showed inflation in the United States accelerating at a pace that exceeded economists’ expectations. The continued rise in prices is partly due to consumers continuing to spend despite increasing costs, as a separate report, issued on Thursday, showed that US retailers’ revenues last month exceeded analysts’ expectations.
As for artificial intelligence stocks, the sharp decline began on Wall Street on Wednesday, before its repercussions extended to the Asian markets, where the Kospi index in South Korea declined by 7.6 percent, and the Nikkei 225 index in Japan by 4.9 percent. These fluctuations returned and cast a shadow on the American markets.
These developments constitute the latest episode in a series of sharp fluctuations in the shares of artificial intelligence companies, which have led the market performance for years. Companies are making huge investments in this field, hoping to increase their profits and enhance productivity. However, establishing data centers and providing artificial intelligence chips require high costs, which has prompted many companies to resort to borrowing to finance these investments.
With bond yields in global markets reaching high levels not seen in years, concerns are increasing about the ability of companies to continue this accelerated spending. Many companies related to artificial intelligence have accumulated significant debt as they seek to achieve their expansion ambitions, while their stocks are under increasing pressure due to financing burdens.
In this context, the shares of Core Wave, a company specialized in providing cloud computing capabilities for artificial intelligence, fell by 7 percent, after falling by 15.5 percent in the previous session. The company announced during the summer that it would pay off outstanding debts worth $4.41 billion during the second half of this year, in addition to $6.18 billion in 2027. As of June 30, the company had cash flow of more than $5.5 billion.
High yields in the bond market also generally make investors less willing to pay high prices for stocks, especially those trading at high valuation levels.
The stock of Nvidia, the company specialized in manufacturing artificial intelligence chips, fell by 3.1 percent, to be the biggest pressure factor on the Standard & Poor’s 500 index. The company has benefited from the artificial intelligence boom to become the highest market value on Wall Street, while its stock has achieved gains of about 1,415 percent since the end of 2022 until the beginning of trading on Thursday.
These losses came despite the announcement of strong profits by one of the leading companies in the artificial intelligence sector, whose results are an indicator of the sector’s performance. Taiwan Semiconductor Manufacturing Company (TSMC) announced quarterly results that exceeded analysts’ expectations, while the company’s chief financial officer, Wendell Huang, said that expectations indicate continued strong demand during the last three months of 2026.
Despite these results, the company's US-listed shares fell by 4.4 percent.
On Wednesday, another pivotal company in the artificial intelligence sector announced strong earnings results, but it did not succeed in restoring investor enthusiasm for the sector. Christophe Fouquet, CEO of the Dutch company ASML, said that the demand driven by artificial intelligence is so strong that some customers are talking about placing orders extending until 2029 and 2030.
On the other hand, US Treasury bond yields declined in Thursday's trading, indicating a rise in bond prices as investors sought to buy them. Treasury bonds are considered one of the relatively safest investment assets, due to the low risk of the US government defaulting on payments, and their demand often increases during times of anxiety and turmoil in the markets.
The yield on the 10-year Treasury note fell to 5.05 percent, compared to 5.19 percent late Wednesday. Returns had exceeded 5.30 percent earlier this month, recording their highest levels since 2002, amid fears of rising inflation and indications of the continued strength of the US economy, among other factors.
The decline in yields came despite the release of stronger-than-expected US economic data, which would normally push yields higher. In addition to retail sales data, another report showed that the number of Americans who applied for unemployment benefits last week was lower than economists’ expectations, which may indicate a decline in the pace of layoffs in the country.
In global markets, South Korean stocks suffered the largest losses, as the KOSPI index, whose performance is dominated by chip companies Samsung Electronics and SK Hynix, fell, recording its worst daily performance since July. Thus, the index has declined by 39 percent compared to its record level recorded last June.
India is expected to surpass Japan to become the fourth largest economy in the world in 2027, with its nominal gross domestic product reaching $4.52 trillion, in a shift that reflects the disparity in growth paths among Asia's largest economies, amid many pressures from rising energy prices, global financial tensions, and the risks of correcting the artificial intelligence boom.
These expectations come at a time when the International Monetary Fund expects the growth of the Asia-Pacific economies to slow to 4.4 percent in 2027, compared to 4.8 percent in the current year and 5 percent in 2025, despite raising its estimates for the current and next years compared to its expectations issued in April.
According to the Fund’s expectations, Japan will fall to sixth place in the world in 2027, behind India and the United Kingdom, after maintaining fourth place during the current year. India is benefiting from strong growth momentum, as the Fund raised its economic growth forecast in 2026 to 7 percent, while the growth of the Japanese economy is expected to slow to 0.7 percent, under pressure from rising energy costs, inflation, and demographic challenges.
The Fund's Asia and Pacific Department Director, Krishna Srinivasan, said that India entered the energy price shock associated with the US-Israeli war on Iran from a strong position, thanks to the strength of its economic fundamentals, financial discipline, and abundance of reserves, which helped it deal with the repercussions of the shock.
On the other hand, Japan faces many pressures from rising energy prices and import costs, in light of the decline of the yen, which recorded its lowest levels against the dollar in 40 years in the summer, in addition to the aging population, which is weighing on economic activity. The continued rise in consumer prices since the spring of 2022 also contributed to increasing inflationary pressures, and prompted the Bank of Japan to raise interest rates to their highest levels in three decades.
Energy risks and artificial intelligence
At the regional level, the Fund indicated that growth expectations are still surrounded by risks that tend to the negative side, most notably the possibility of prolonging the conflict in the Middle East, which may keep commodity prices high and increase pressure on energy-importing economies.
On the other hand, investments related to artificial intelligence have contributed to supporting the economies of advanced Asia, as their growth is expected to rise to 3.2 percent in 2026, compared to 2.5 percent last year. But the Fund warned that any correction in the investment boom in these technologies could put pressure on global growth, with Asia exposed to greater risks due to its exposure to technology production chains and artificial intelligence.
Projections show additional disparity between advanced and emerging economies in the region. Growth in emerging Asian economies is likely to slow to 5.1 percent in 2026, from 5.6 percent in 2025, affected by rising energy costs.
Bond yields put pressure on public finances
The Fund warned that the continued rise in global bond yields or disturbances in the debt markets of major economies, including the United States, Britain, the euro zone and Japan, may spread to Asian markets, raising borrowing costs and exacerbating pressures on public finances.
Public debt levels and high financing needs in parts of the region increase the risk of tightening financial conditions, which could raise debt service burdens and limit the ability of governments to increase spending to confront shocks.
In this context, Srinivasan called on central banks to continue to give priority to price stability, clearly communicate monetary policy directions, and prepare to tighten them when inflation expectations are less well-established or inflationary pressures are more persistent, while maintaining the independence of central banks.
He also stressed the limited fiscal space as public debt remains higher than levels before the “Covid-19” pandemic, calling for the adoption of temporary and specific support measures for the most affected groups, instead of comprehensive support for fuel prices or imposing price restrictions, as these measures may result in high financial costs.
The cost of insuring against the risks of potential debt default at American technology companies has reached record levels, in the latest indication of growing credit pressures associated with what are known as “artificial intelligence investments,” especially data centers that depend on future revenues.
Although shares of companies leading the artificial intelligence boom are still among the biggest gainers in global stock markets this year, many of them have witnessed a sharp decline over the past few weeks, with investors reevaluating the cost of capital in light of rising interest rates and inflation.
Some investors and analysts also have doubts about the timing, or even the prospects, of achieving returns on the billions of dollars of investments being pumped into data centers, computing capabilities, and other infrastructure.
At the same time, demand has increased for credit default swaps, which are tools that provide protection against the risks of financial default and gained great importance during the financial crisis in 2008, even for major companies such as Apple, Amazon, and Microsoft.
As for companies competing with these institutions, or their suppliers or customers, who bear greater debt burdens, the cost of these contracts has increased at a faster pace.
What are credit default swaps?
They are derivative financial instruments that provide protection against the risk that the bond issuer, whether a company or a government, will fail to meet its financial obligations.
Bond investors expect to receive interest payments and a return of principal at maturity, but face the possibility of not paying these receivables.
Purchasing credit default swaps helps investors hedge these risks; It effectively acts as a form of insurance against default or other credit events. For example, if the value of a bond decreases for any reason, the investor may resort to increasing his holding of these contracts to compensate for part of the losses.
It should be noted that none of the companies whose credit default swaps costs have risen recently have defaulted on their obligations, nor have they indicated that this might happen.
Is this a huge market?
According to the International Swaps and Derivatives Association (ISDA), the market for single-linked credit default swaps (Single-name CDS), covering bonds of a single issuer, is about $9 trillion. Data from the Bank for International Settlements indicate that this size represents a small portion of global bond markets, the value of whose outstanding securities exceeds $150 trillion.
Contracts linked to government debt are the largest within the credit default swaps market.
According to the latest data issued by the Depository Trust and Clearing Corporation, the average daily trading in the market for these contracts as a whole reached $16 billion during the second quarter, compared to $13 billion in the same period of the previous year.
However, daily trading volumes may remain limited, even for large corporate contracts, and may sometimes be limited to single digits. This means that relatively small transactions may affect prices to a disproportionate degree to their size.
Who buys credit default swaps?
Bond investors typically purchase these contracts through an intermediary, often an investment bank, who then arranges the protection with a financial institution that provides it. These transactions are classified as over-the-counter transactions, meaning they do not pass through a central clearing house.
Hedge funds also participate in this market, selling credit default swaps to investors seeking to hedge specific risks.
The buyer pays a periodic fee known as a “premium” to the seller, who in return bears the risk of a credit event, such as a default.
These contracts are priced based on what is known as the “credit spread,” which is the number of basis points that the seller of the contract charges from the buyer in exchange for providing protection. The higher the perceived risk of a credit event occurring, the wider the margin.
For example, if the spread on a credit default swap contract is 100 basis points, this means that the insurance cost is $1 per year for every $100 of debt covered.
What is happening in the market for these contracts with technology companies?
Standard & Poor's Global Market Intelligence data shows that the cost of credit default swap contracts for CoreWave, a debt-laden data center operator at the heart of the current turmoil, exceeded 1,000 basis points.
These prices indicate a rise in the probability of implied default to about 63 percent over the next five years, compared to about 30 percent a year ago.
The price movements of these contracts in the technology sector reflect investors’ concern about the speed with which huge investments in artificial intelligence will turn into profits, and the extent to which debt-laden companies are able to achieve sufficient returns at the speed required to cover the growing interest costs.
Oracle's credit default swap contracts were trading at about 300 basis points, which is much higher than the contract levels of other companies related to artificial intelligence.
These contracts for Nvidia rose sharply in recent weeks to about 90 basis points, while they reached about 104 basis points for Meta.
For comparison, the investment grade CDS index trades at around 60 basis points.
What triggers a CDS payout?
Compensation under these contracts is paid upon the occurrence of a specified credit event, which may include bankruptcy or default of the issuer on the bonds.
When concerns about an issuer's creditworthiness increase, demand for protection typically rises, causing CDS spreads to widen.
If these contracts provide insurance, where is the problem?
Credit default swaps provide a means of hedging for bondholders. But higher expected risks increase the cost of protection, which may prompt investors to sell bonds and raise borrowing costs for issuers.
These developments may exacerbate concerns about creditworthiness, creating a vicious circle in which borrowing costs increase as risks rise, which in turn increases financial pressures on companies.
