‘It’ll likely start as a credit event’: How neocloud woes threaten the S&P 500

Wall Street strategists warn that declines in shares of AI cloud-computing providers will spill over into other parts of the tech sector, potentially dragging the U.S. stock market back to its June lows, Bloomberg reports.

CoreWeave and other neocloud stocks fell on Monday after Elon Musk predicted “guppy-level death and consolidation” among cloud providers. They later turned positive alongside the major stock indexes as Anthropic’s prospectus fueled broader optimism about AI and tech stocks. At the time of this writing, CoreWeave is up 4%, Iren almost 5%, and Arkady Volozh’s Nebius 1%.

Despite Monday’s gains, CoreWeave stock has lost more than 35% over the last month, Iren almost 41%, and Nebius 32%. Investors are selling shares of neocloud companies, which provide computing power to AI model developers. They are concerned about how much debt these companies have already taken on and how much more they will borrow after reporting earnings. Those fears pushed gauges of credit risk for Meta and SpaceX, two of the biggest tech companies investing in AI, to record highs last week.

After the Nasdaq 100 plunged almost 3% on Thursday, October 22, and the S&P 500 suffered its worst session since late July, strategists expect the neocloud selloff to take an increasing toll on the stock market, Bloomberg writes.

“It’s now transitioning from being a micro event to a macro event,” Reynolds Strategy chief market strategist Brian Reynolds said of the selloff. “In other words, it’s not just impacting the neoclouds, but the entire credit market and then the stock market.” He expects further selling that could push the S&P 500 back to its June lows, around 7,200. That would represent a 4.7% decline from the benchmark’s close on Friday, October 23. Reynolds would be ready to buy at that level. “I want to be defensive in the very near term, for a few weeks,” he said. “I really want to buy at that low 7,200 area.”

Neoclouds rely heavily on bond issuance to fund their spending. But rising U.S. Treasury yields and persistent inflation are making borrowing more expensive, Bloomberg writes. If these companies cut future capex plans to reassure investors, that would be a major headwind for chipmakers, warned Wells Fargo chief equity strategist Ohsung Kwon. Their revenue comes directly from data-center developers spending huge sums on chips. “If they start to see risk around their financing and the market pushes back on their capex a lot more than what we’re seeing today, and if they cut capex next year, that’s going to be a risk to semis,” Kwon said.

Those concerns have already weighed on the Philadelphia Stock Exchange Semiconductor Index, which has lost 12% over the last month, Bloomberg reports. Several Wall Street strategists now warn that the neocloud rout is giving the broader market a reality check amid concerns about an AI bubble.

“If the AI bubble is going to burst, it’ll likely start as a credit event as neocloud and risky AI debt defaults, creating a cascade of devaluations, reduced spending and contraction (in multiples and growth),” Sevens Report founder Tom Essaye wrote in a note last week. He added that he continues to watch for signs of stress in credit markets.

Neocloud stocks are currently showing “asymmetric” responses to credit stress, argue Barclays strategists led by Venu Krishna. “Widening spreads prompt outsized declines, while tightening provides limited relief, underscoring skepticism around the neocloud business model’s durability,” they wrote.

Krishna is watching for “signs of contagion” in the stock market but has yet to see evidence that the problem has spread beyond tech and growth stocks. Investors are rotating out of high-flying tech stocks and into defensive sectors. That signals uncertainty about the AI trade rather than indiscriminate selling that hits everything at once, Bloomberg notes.