Global markets face rising risks as AI investment trade shows strain

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Global markets face AI risk

Highlights

Over $2 trillion in market value was erased from the Nasdaq 100 last month as investors questioned rapid AI spending's ability to deliver profits amid rising rates.
Benchmark 10-year U.S. Treasury yield fell almost 20 basis points on October 22 but remains near 5%, amplifying financial stability concerns as investors shift to safer assets.
Danske Bank expects major U.S. tech companies to invest $1.2 trillion in AI infrastructure next year versus $900 billion this year, putting over 40% of the S&P 500 at risk if AI leadership falters.

AI-driven market support comes under scrutiny

As reported by Reuters, investors are growing more cautious about whether the huge sums flowing into artificial intelligence can keep delivering returns quickly enough as borrowing costs stay elevated and geopolitical risks intensify.

So far, heavy AI spending, helped by Washington's light-touch approach to business, has pushed stock markets to record highs and supported expectations for global economic growth of 3% this year. But U.S. President Donald Trump's uneven trade policies and the Iran war's shock to energy prices are reviving inflation pressures, increasing the chance that central banks keep interest rates higher for longer.

That backdrop is feeding concern over the resilience of the AI trade. More than $2 trillion in market value was erased from the Nasdaq 100 last month as investors reassessed Big Tech earnings and the pace at which AI-related spending can translate into profits. The cost of insuring some tech bonds has climbed, some proposed data center projects are struggling to secure financing, and technology shares from South Korea and China to the U.S. have fallen.

At the same time, investors are moving into safer assets. The benchmark 10-year U.S. Treasury yield fell almost 20 basis points on October 22, its biggest one-day drop since early 2023, though it remains near 5%, a level some investors view as a threat to wider financial stability.

Several analysts and former policymakers say the risks are building. Jim O'Neill, former Goldman Sachs chief economist and former British Treasury minister, warns that if inflation does not ease, debt-funded investment into AI could become a bigger vulnerability. Former FDIC chair Sheila Bair also points to rising leverage among AI companies and reduced fiscal room for governments if another crisis hits.

Debt, inflation and geopolitics deepen global strains

Pressure is also visible well beyond the U.S. technology sector. In France, bond yields have climbed to levels last seen during the 2012 euro zone debt crisis, limiting the government's ability to respond to protesters amid the country's worst civil unrest in years. In Japan, bond yields have recently reached 30-year highs, adding pressure on authorities to raise rates faster and potentially disrupting global capital flows.

Mike Riddell, a lead portfolio manager at Fidelity International, says there are signs that parts of the system are starting to break, pointing to stress in France and Australia, where the housing market is suffering its worst downturn in decades. German bonds, also seen as a haven, are becoming more attractive in that environment.

Despite the anxiety, some data still support a more constructive view. Recession warnings over the past two years have not materialized, European economic indicators are proving more resilient than expected, and labor markets remain stable. In the U.S., 84% of S&P 500 companies reporting third-quarter results so far have beaten consensus estimates, according to LSEG data.

Even so, much of that resilience is tied to AI spending. Danske Bank estimates that a group of major U.S. tech companies is poised to invest $1.2 trillion next year on AI infrastructure, after an expected $900 billion this year. Tech and AI shares make up more than 40% of the S&P 500 and account for much of the index's 70% gain over the past five years, leaving markets vulnerable if leadership narrows further.

The broader macroeconomic backdrop is also worsening. The Iran war, which has lasted for months, is disrupting oil supplies and driving crude prices to $105 a barrel, up almost 75% this year. Emerging-market currencies from Indonesia to the Philippines have fallen to record lows as higher oil prices force central banks to raise rates.

According to the Institute of International Finance, total global debt stands at more than $350 trillion, nearly three times the size of the world economy. Tina Fordham of Fordham Global Foresight says fractured alliances could make coordinated crisis-fighting harder than in 2008, while foreign investors' record purchases of U.S. securities leave global markets highly exposed if the AI trade weakens further.

Our earlier article on U.S. AI data-center expansion highlighted how the infrastructure boom is running into higher financing costs, construction delays, and power constraints. We noted that only a minority of planned projects look credible, while cost overruns and shifting investor sentiment are making it harder for developers to secure capital and deliver capacity on time.

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