AI debt is hitting record levels at the worst possible time

Wall Street is starting to face what could be the most important challenge to the AI investment boom, which has delivered the lion’s share of S&P 500 gains since the bull market began four years ago and is single-handedly keeping the domestic economy afloat despite quickening inflation and a moribund job market.

It’s the same challenge that has undone many of the biggest booms in American economic history, and it’s tied to the bond market.

The flood of AI investment has shifted this year from one financed by the cash generated by the world’s biggest tech companies to one that’s become increasingly reliant on their borrowing.

So much so, in fact, that the share of debt issuance this year from the tech sector alone has reached around $623 billion, according to data from Wells Fargo, and comprises a record share of borrowing from nonbank companies.

That might seem sensible, given the eye-watering tallies that are needed for the AI buildout.

Just taking the needs of the four largest hyperscalers—Amazon, Alphabet, Microsoft, and Meta Platforms—gets you to a total of $730 billion in capital spending this year, with another $1 trillion-plus expected in 2027. Adding in lower-credit-quality borrowing from companies such as Oracle, and neocloud spending from the likes of CoreWeave, takes the 2027 tally to around $1.6 trillion.

But the cost of that debt is rising, and the implications of the tech sector’s new reliance on leverage, which comes just as investors are starting to question the efficacy of AI investments, could be significant.

Wells Fargo analysts, led by chief equity strategist Ohsung Kwon, estimate that around a third of this year’s AI capital spending has been financed in the bond market, a level that surpasses both the shale oil boom of the mid-2000s and the telecom expansion cycle of the late 1990s.

And that debt is now getting more expensive.

In anticipation of those forces, the tech industry is striking fast.

But the bills are piling up. And they have to be paid.