AI stocks slide as bond market cracks under $244 billion debt wave

Three converging pressures — a saturated AI bond market, a hawkish Fed, and an oil surge — triggered a broad selloff in AI stocks.

The Nasdaq Composite fell below its 50-day moving average on July 13, dragged lower by AI and semiconductor stocks as three macro pressures converged.

"The credit desk is more stressed than the equity desk for the first time in years — 'brutal' is the word being used," said Brian Garrett, head of derivatives trading at Goldman Sachs.

The selloff was broad-based, with the Magnificent Seven and the remaining S&P 493 stocks falling by roughly the same magnitude, a sign of broad market contraction rather than sector rotation. The Philadelphia Semiconductor Index was among the hardest hit. The CBOE Volatility Index rose as the 10-year real yield climbed to 2.34%, its highest since April, from 2.11% at the end of June.

The moves raise the stakes for this week's CPI and PPI releases, which will determine whether Fed Governor Christopher Waller's warning of a potential rate hike becomes policy. A quarter-point increase at the July 29 FOMC meeting is now priced in by nearly 40% of traders, up from near zero just weeks ago.

Bond Market Reaches Absorption Limit

AI-related bond issuance from six major technology companies — Alphabet, Amazon, Meta, Oracle, Nvidia and SpaceX — has reached about $244 billion year-to-date, more than double the $108 billion issued in all of 2025 and 14 times the $17 billion in 2024, according to Goldman Sachs data. The flood of supply has pushed spreads on the bank's AI bond basket wider by about 25 basis points.

More concerning, the market's capacity to absorb new issuance has collapsed. Goldman Sachs investment-grade bond trader Jeffrey Papai said that while $750 billion of supply was previously needed to stress the market, now as little as $250 billion is enough to push it into distress. The six hyperscalers plus three major chip companies now account for 9% of the investment-grade bond index on a duration-weighted basis — before chip financing has meaningfully begun.

Morgan Stanley data shows the leverage ratio of hyperscalers has doubled to 1.8 times from 0.9 times in the third quarter of 2025, surpassing the entire energy sector's leverage and rising at about 0.3 times per quarter.

Fed Warning and Oil Shock Compound Pressure

Fed Governor Christopher Waller on Monday warned that if core inflation data this week comes in hot, the Federal Open Market Committee would need to consider tightening monetary policy. The 2-year Treasury yield rose 6 basis points on the day, while the 30-year yield added 3 basis points. Core PCE inflation stands at 3.3% year-over-year, a level Waller flagged as persistently elevated.

Oil added a third layer of pressure. West Texas Intermediate crude surged about 9% to near $78 a barrel as commercial transits through the Strait of Hormuz collapsed to just three in 24 hours, down from 57 at the June 24 peak, as US-Iran tensions escalated. Higher energy prices feed into broader inflation measures, reinforcing the case for tighter Fed policy.

Apollo Chief Economist Torsten Slok warned that AI is the sole pillar supporting the economy and markets, and if returns take longer to materialize than expected, the fallout could extend into a broader recession and S&P 500 correction. Bank of America Chief Investment Officer Michael Hartnett listed AI capex cuts as the top tail risk, with a trigger path of bond vigilantes cutting off hyperscaler liquidity.

BTIG's Jonathan Krinsky outlined three scenarios: a continued rotation out of tech (40% probability), a reversal back into tech (20%), or a broad market selloff similar to late July 2024 (40%) — a probability he said rose significantly on Monday given the real yield surge, the KOSPI crash, and the rising odds of a July rate hike.

This article is for informational purposes only and does not constitute investment advice.