Equity investors are increasingly concerned about the level of leverage that major technology companies are using to develop their artificial intelligence infrastructure, particularly in light of rising fears about a potential market bubble.
While technology firms have historically invested heavily in AI, the unprecedented level of debt being incurred to finance these endeavors marks a significant shift. This development raises alarms among investors, as it diverges from the recent trend of companies utilizing their substantial cash reserves to cover capital expenditures. The introduction of leverage and the interconnected nature of various financing arrangements present risks that were previously absent.
Lisa Shalett, chief investment officer for Morgan Stanley’s wealth management division, expressed that the AI landscape is evolving into a new phase characterized by increased volatility and risk.
On Friday, the Nasdaq 100 Index increased by 1.6%. Nvidia Corp shares fluctuated throughout the day but surged in the afternoon after reports from Bloomberg News indicated that U.S. officials were contemplating allowing the company to sell its H200 AI chips to China.
Notably, just months ago, AI spending was primarily driven by a select group of companies with solid balance sheets and a steady growth in free cash flow. This has changed, altering the risk profile within the tech sector.
Recent market behavior illustrated this new dynamic as tech stocks initially rallied following Nvidia’s positive earnings report, only to decline later as investors analyzed the capital requirements necessary for a future centered around AI in relation to potential profitability.
Shalett noted that the tech ecosystem has expanded to include companies with weaker balance sheets, such as Oracle and CoreWeave, alongside increased indebtedness. Additionally, the interconnected revenue relationships among players enhance systemic risk.
Investor apprehension has led to a drop in valuations among major tech firms. The forward 12-month price-to-earnings ratio for the Bloomberg Magnificent 7 Index has decreased to its lowest point in over two months, aligning with its five-year average.
The five leading AI investors—Amazon.com Inc, Alphabet Inc, Microsoft Corp, Meta Platforms Inc, and Oracle Corp—have collectively raised a record $108 billion in debt in 2025, more than three times the average amount raised over the preceding nine years, according to Bloomberg Intelligence.
All Eyes on Oracle
Oracle’s financial activities have garnered particular scrutiny. After the company sold $18 billion in U.S. investment-grade bonds to finance its AI initiatives and banks initiated a $38 billion debt offering for data centers linked to Oracle, its stock prices soared in September. However, the shares have since plummeted by 40% from a record high reached on September 10, as investors reassess the implications of the company’s aggressive capital expenditures on its balance sheet. This decline is poised to be Oracle’s largest monthly drop since August 2001.
Five-year credit default swaps on Oracle, indicating leverage risk, have reached their highest levels in three years.
Arnim Holzer, a global macro strategist at Easterly EAB, remarked, “It shouldn’t be surprising to see Oracle’s CDS rise. These companies are investing and committing to significant capital expenditures, much of which will be financed with debt. This doesn’t necessarily mean Oracle’s stock is failing, but it is likely to experience more volatility.”
Oracle has projected $35 billion in capital expenditures for its current fiscal year, mostly allocated to its cloud services. This spending is impacting the company’s balance sheet, leading to an anticipated negative free cash flow of $9.7 billion this year, marking the first fiscal loss since 1990. This deficit is expected to increase further, reaching negative $24.3 billion by fiscal 2028.
S&P Global Ratings recently revised its outlook on Oracle to negative, citing a strained credit profile due to the expected capital expenditures and debt issuance aimed at accelerating AI infrastructure growth.
The trend of accumulating debt is not limited to Oracle. Meta has issued $30 billion in bonds, while Alphabet raised $38 billion and Amazon.com Inc acquired $15 billion, as reported by Bloomberg Intelligence.
A ‘Show Me the Money’ Phase
Robert Schiffman, a senior credit analyst at Bloomberg Intelligence, remarked, “We may just be at the beginning of an AI capital expenditures buildout, which suggests we could also be in the early stages of increasing leverage on balance sheets. I would be concerned that this surge of issuance might only be the start of what is to come over the next few years.”
Previously, capital expenditures were largely deemed essential for participating in AI, with some investors viewing them positively as indicators of corporate confidence. However, increasing scrutiny now surrounds these investments, as Wall Street professionals demand stronger returns. The debt factor complicates these imperatives further.
“When companies that don’t need to borrow start borrowing to fund investments, it raises the stakes for the expected returns on those investments,” said Bob Savage, head of markets macro strategy at BNY. “We are in a ‘show me the money’ phase.”
Despite elevated levels of leverage, investors remain generally optimistic about large-cap technology stocks due to their sustained earnings growth and robust competitive standings. Furthermore, estimates from UBS indicate that approximately 80% to 90% of planned capital expenditures from key tech firms will be sourced from their cash flows.
Savage commented, “While it may seem excessive to claim that these offerings signal a major turning point or that the AI hype bubble will burst, the debt could add complexity to the narrative, though it doesn’t fundamentally alter the thesis.”
Published on November 22, 2025.
