CoreWeave Slump Fuels AI Investment Angst as Rates, Election Threaten Year-End Rally
Summary
- CoreWeave’s share plunge, debt-servicing burden and funding concerns are pressuring expectations for a year-end rally in U.S. stocks.
- Earnings reports from major technology companies and cloud growth are emerging as key variables for AI demand and related companies’ fundraising.
- The possibility of rate hikes, supply concerns in the memory sector, and the potential for data-center regulation could affect investment priorities in AI and related stocks as well as the year-end rally.
Forecast Trend Report by Period
Debt-servicing pressure at artificial intelligence infrastructure companies is weighing on hopes for a year-end rally in U.S. stocks. CoreWeave’s sharp share drop has sharpened concerns over funding, while the prospect of further monetary tightening and possible data-center regulation after the midterm elections has emerged as another risk.
CoreWeave shares fell about 12% on October 16. The stock had plunged 15% on October 14, then rebounded 6% on October 15, before extending losses again a day later. Rising inflation and the possibility of higher interest rates are adding to the strain on heavily indebted AI infrastructure companies.
CoreWeave faces about $13.5 billion in principal and interest payments due by the end of next year. That exceeds its projected revenue of about $10 billion next year. With operating losses continuing, the company still needs additional funding. The market yield on bonds it issued in July has also climbed into the 15% range, intensifying concern about financing conditions.
Wall Street is divided. Deutsche Bank, Bank of America and JPMorgan view the selloff as a buying opportunity. Still, a Deutsche Bank analyst added that, as an equity analyst, he may be missing some of the technical aspects on the credit side. Ruchir Sharma, chairman of the Rockefeller Foundation, said higher rates ultimately burst bubbles.
Earnings reports from major technology companies over the next two weeks are emerging as a key test of AI investment sentiment. Faster cloud growth could restore confidence in AI demand and help financing for related companies. SpaceX is scheduled to report its first quarterly results since listing on October 20, while Meta will release earnings on October 21.
Even within AI-related stocks, caution is building around memory names. UBS said it is keeping the memory segment low on its investment priority list despite attractive valuations, citing medium- to long-term supply concerns and the possibility of additional capacity entering the market. The bank said output expansion by Chinese companies could weigh on future supply-demand conditions.
The business environment after the midterm elections is also in focus. 22V Research estimated that if a Democratic candidate or a Republican candidate who has pledged tighter data-center regulation wins, the number of states with policy environments favorable to data centers would fall to about 15 from 27.
Stronger-than-expected U.S. consumer prices, producer prices and import prices for September are also fueling concern about further tightening. The Fed could still raise rates by 0.5 percentage point in December even if it holds rates steady in October, some analysts argue. Neil Dutta, an economist at Renaissance Macro, said ruling out a hike at the October meeting could risk forcing the Fed to deliver more rate increases later.
