The use of leverage and the circular nature of many of the financing deals introduces a level of risk that wasn’t there before
by Ryan Vlastelica
Wall Street is growing increasingly concerned about the amount of leverage that Big Tech is taking on to build out its artificial intelligence infrastructure as the industry faces rising fears of a bubble.
The enormous sums major technology companies are spending on AI are nothing new, but the record pile of debt they’re raising to do it is. What’s worrying investors is the trend represents a break from recent history, when companies tapped their huge cash piles to pay for their capital expenditures. The use of leverage and the circular nature of many of the financing deals introduces a level of risk that wasn’t there before.
US stocks were set for another drop on Friday, with S&P 500 futures falling 0.4% and Nasdaq 100 futures dropping 0.8%. US equities are on track for their biggest weekly drop since early April.
“I view this as the AI story maturing and entering a new phase, one that is likely to be marked by more volatility and additional risk,” said Lisa Shalett, chief investment officer of Morgan Stanley’s wealth management arm.
Just a few months ago, AI spending was primarily coming from a few companies with strong balance sheets and robust growth in free cash flow. That has changed, and the tech industry’s risk profile has along with it.
The new dynamic was on display Thursday, as tech stocks swung from way up after Nvidia Corp.’s strong earnings to way down as investors assessed how much capital will be required to finance an AI world compared with the profitability timelines of those investments.
“We’ve seen an expansion of the ecosystem to include companies with weaker balance sheets like Oracle and CoreWeave, more debt, and we’ve also seen more interlocking and circular revenue relationships,” Shalett said. “That interconnectivity between the players brings systemic risk.”
The five major spenders on AI — Amazon.com Inc., Alphabet Inc., Microsoft Corp., Meta Platforms Inc. and Oracle Corp. — have raised a record $108 billion in debt combined in 2025, more than three times the average over the previous nine years, according to data compiled by Bloomberg Intelligence.
Oracle’s offerings have come under particular scrutiny. The stock soared in September after the company sold $18 billion in US investment-grade bonds to ramp up its AI spending and banks launched a $38 billion debt offering to fund data centers tied to Oracle. But since hitting a record high on Sept. 10, the shares have plunged 33% as investors reassess what the company’s aggressive capex is doing to its balance sheet and how it is financing its huge capital expenditures.
Five-year credit default swaps on Oracle, which reflect leverage risk, have blown out to their highest level in three years.
“To see Oracle’s CDS go up shouldn’t be surprising,” said Arnim Holzer, global macro strategist at Easterly EAB. “These companies are investing massive amounts and committing to massive amounts of capex, some of which will be financed with debt. This doesn’t mean Oracle’s stock is trash, but it should be more volatile.”
Oracle has forecast $35 billion in capital expenditures in its current fiscal year, with much of it going to its cloud business. The spending is taking a toll on the company’s balance sheet, with free cash flow expected to be negative $9.7 billion this year after falling into the red last year for the first time since 1990. The deficit is projected to expand in the subsequent two fiscal years, reaching negative $24.3 billion in fiscal 2028.
S&P Global Ratings recently revised its outlook on Oracle to negative “because of its strained credit profile from anticipated capex and debt issuance to fund accelerating AI infrastructure growth,” it wrote in a note dated Nov. 6.
But the credit binge isn’t just on Oracle. Meta has issued $30 billion worth of bonds, Alphabet sold $38 billion, and Amazon.com Inc. raised $15 billion, according to Bloomberg Intelligence.
“We might just be in the beginning stages of an AI capex buildout, but that sort of also implies we’re probably in the early stages of releveraging balance sheets,” said Robert Schiffman, senior credit analyst at Bloomberg Intelligence. “I would be worried that this flood of issuance is probably just the start of things to come for the next couple of years.”
Until recently, capex was accepted as a necessity of participating in AI. Some investors even viewed it as a positive reflection of confidence by the companies. But it’s coming under increasing scrutiny as those Wall Street pros want to see stronger returns on the investments. Adding debt to the equation only sharpens that issue.
“When companies that don’t need to borrow are borrowing to make investments, that sets a bar for the returns on those investments,” said Bob Savage, head of markets macro strategy at BNY. “We’re in a ‘show me the money’ phase.”
Still, despite the increased leverage, investors remain generally positive on megacap tech stocks due to their durable earnings growth and strong competitive positions. What’s more, about 80% to 90% of planned capex from big tech firms is coming from their cash flows, according to UBS estimates.
“It seems a little overblown to say that these offerings are a major turning point and that the AI hype bubble will be burst,” Savage said. “The debt could complicate the story, but I don’t think it changes the thesis.”
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