Higher bond yields can hurt the AI trade after all. AI-linked industrial stocks took it on the chin Wednesday as CoreWeave's bond yields touched troubling levels.
AI is driving much of the stock market. That isn't a controversial thought. AI data centers cost tens of billions of dollars to build, so the boom needs a lot of capital to keep the flywheel going. Things had been humming along until CoreWeave threw some grit in the gears.
Shares of the AI-computing-as-a-service company fell more than 17% in late trading after yields on its bonds reached roughly 15%.
A yield that high typically signals concerns about financial distress. It's impacting the entire AI value chain. Nvidia stock was down 3.5% in late trading. Industrial stocks linked to the AI trade were hit even harder. Shares of power-generation equipment providers GE Vernova and Caterpillar were down 8% and 3.5%, respectively.
AI infrastructure provider Vertiv's shares were down 6.8%. Shares of Eaton and Schneider Electric, which provide electrical components, fell 5% and 2%, respectively. Shares of cooling-equipment providers Trane Technologies and Carrier dropped 1.9% and 2.2%, respectively.
To be sure, CoreWeave's balance sheet appears stretched. It ended the second quarter with more than $30 billion in short- and long-term debt. That's a lot. The company is expected to generate about $7.5 billion in earnings before interest, taxes, depreciation, and amortization (Ebitda) in 2026, but that figure is expected to grow to almost $17 billion in 2027.
That expected Ebitda growth doesn't fully explain the bond scare, but free cash flow is also a problem. CoreWeave is spending tens of billions of dollars a year on AI data centers. Free cash flow is expected to be negative $27 billion in 2026 and negative $32 billion in 2027.
CoreWeave needs external capital to fund its growth. Now new borrowing could be much more expensive. That might limit growth and crimp earnings expansion, which can make capital even more expensive. That's the kind of negative cycle investors fear.
Few industrial stocks were spared on Wednesday. TE Connectivity stock was down 2.5%. Amphenol stock fell 3.9%. Even benchmark copper prices dropped 1.5%. Shares of copper miner Freeport-McMoRan were off 4.6%.
Investors took some cover in defense shares. Lockheed Martin and Northrop Grumman stocks rose 3.4% and 3.2%, respectively. Defense stocks had been weak since the Iran war began in late February. Heading into Wednesday trading, major defense contractors' shares were down an average of 25%, trailing the S&P 500 by almost 40 percentage points.
Industrial investors can continue to rotate into the few names relatively unaffected by AI. Water technology company Xylem's shares were down less than 1%.
That is only a partial solution. Investors will also have to watch bond yields and CoreWeave stock to understand what's happening -- and to determine whether CoreWeave's issues are a bump in the AI road or something more serious.
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