BlackRock's president has stated that there is no bubble in artificial intelligence (AI). US Treasury Secretary Bessent also sees no "systemic problems" in this boom. But no matter how hard Wall Street's top executives try to suppress market concerns about this sector, the market refuses to calm down.
The Nasdaq 100 index posted its worst two-week performance since last April, while measures of credit risk and market turbulence have both risen sharply. A basket of AI-related stocks plunged 4.9%, and investors rushed into US Treasuries, pushing the 10-year Treasury yield below 5% for the first time in a month. The safe-haven trade that had briefly disappeared during the summer has returned. Taken together, these market shifts show that investors are increasingly doubting a trading logic that had been almost universally accepted on Wall Street: going long on large technology stocks while shorting defensive parts of the market that were under pressure from fears that AI-related spending would reignite inflation.
Although previous rounds of market volatility ultimately proved manageable, this week's rally in Treasuries, according to Neuberger Berman's Jeffrey Blazek, is evidence that a more significant shift may be underway. Blazek, who is co-chief investment officer for multi-asset at the $630 billion firm, said: "This time it is aggressive—we are seeing money pour into quality assets, performing in complete contrast to the AI trade, and investors are buying US Treasuries for safety. This is a complete plot twist."
Neuberger's asset allocation committee began reducing equity risk exposure about a month ago due to concerns that the AI trade was overheating and that interest rates were rising.
The Shift in Market Dynamics
During the latest round of AI selling, Treasuries regained their safe-haven status, in contrast to the situation in July.
Stocks fell this week, with the S&P 500 index down 0.5%. The technology-heavy Nasdaq 100 index fell 0.8% and has now retreated 7.3% from its record high set earlier this month. Meanwhile, the largest ETF tracking long-term bonds rose for a third consecutive week, and the fund is on track for its best month since last February.
This shift in capital is also reflected in ETF flows. According to Baird Strategas data, the gap between demand for equities and fixed-income assets has fallen to a record-low range of 10%, indicating that investors increasingly prefer bond exposure.
Much of investors' unease is focused on the enormous sums companies are borrowing and spending on AI, and whether the technology can generate returns quickly enough to justify that spending. This week, reports said that one of the leading AI developers, Anthropic, may spend $750 billion on additional computing capacity in the coming years. Meta Platforms (META.US) said it will spend about $825 billion in the future on computing capacity as well as AI infrastructure leases and contracts. The company's stock fell more than 9% this week, its biggest weekly decline since May; after the plan was announced, a gauge of the company's credit risk rose to a record high.
The cost of debt protection for other hyperscale cloud computing companies and chipmakers also rose sharply. At the same time, corporate bond yield premiums widened globally. A key risk gauge in the US corporate bond market—the CDX investment-grade index—rose as much as 1.5 basis points on Friday to 64.4, the highest intraday level since March. The index rises when investors' concerns about credit risk intensify.
As investors begin to pay closer attention to AI's impact on the economy, a basket of AI stocks has moved in the same direction as the 10-year Treasury yield for nine consecutive weeks, the longest period of synchronized movement since OpenAI launched ChatGPT. This stands in sharp contrast to the market pattern in July, when the AI trade and Treasuries lost momentum at the same time.
Cameron Dawson, chief investment officer at NewEdge Wealth, said: "As the stocks that previously led the market begin to falter and capital shifts toward more defensive areas, while credit indices flash stress signals, investors now have a reason to seek the relative safety of bonds."
However, even as the bond market keeps sending cautious signals, some prominent figures are still pushing back against concerns that the AI trade could pose a broader threat. According to the Financial Times, Bessent told investors at a closed-door meeting that he does not see systemic problems in the AI boom. Blackstone's Jon Gray conveyed a similar view, arguing that investors should not worry that the AI trade is turning into a bubble.
JPMorgan strategists including Nikolaos Panigirtzoglou attributed the sharp selloff in AI stocks to so-called VaR shocks. The term refers to situations in which asset managers' risk models trigger forced selling. In their view, investors who built large positions during the relatively calm months recently are now being forced to unwind them as volatility suddenly surges. The team estimates that chipmakers account for about one-fifth of total risk capital in global equity markets. Panigirtzoglou and his colleagues wrote in a report: "VaR shocks do not necessarily need fundamental factors as a trigger; they more often reflect position adjustments. Given the recent decline in semiconductor stocks, we suspect that the unresolved risk from previously excessive long exposure in semiconductors has largely been cleared."
Still, the market's shift toward a defensive posture is showing up in the US ETF market, where demand for fixed-income funds is rising. Data shows that so far this month, investors have put about $58 billion into bond ETFs, accounting for about 38% of all ETF flows. This is already the second consecutive month in which fixed-income assets accounted for more than 35% of overall flows, and the first back-to-back occurrence since the start of last year. Strategist Athanasios Psarofagis said: "Over the past two months, bond inflows have clearly outperformed their usual share. Part of that may reflect investors' greater preference for defensive assets, but current yields are also attractive enough that investors may simply want to lock in some income while they still can."
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