Fears about the debt financing behind the artificial intelligence buildout have cooled after a stretch of volatility, but the coming week brings fresh tests. Oracle holds its Investor Day on Wednesday, and Alphabet and Amazon are both due to report quarterly results after the market close on Wednesday and Thursday respectively, according to CNBC. Microsoft also reports on Wednesday, though it has not raised bonds to fund its AI spending.
Why it matters
The credit market has become a gauge of investor confidence in the AI boom, because the companies building data centers and buying chips are increasingly leaning on borrowed money. Spreads on credit-default swaps — the cost of insuring against a borrower defaulting — widened last week and have since pulled back. The direction of those spreads in the days ahead will show whether investors believe the spending is sustainable or whether the anxiety returns.
Meta Platforms offered the clearest signal of the shift. The company said on Monday it plans a $95 billion stock offering, and the announcement narrowed its CDS spreads. Those spreads had climbed the previous week when Meta reported negative free cash flow for the third quarter. Other companies' spreads had also widened, and they too have since retreated.
Richard Cheng, who leads Nuveen's investment-grade corporate sector team, told CNBC that investors had been braced for Meta to launch a large bond sale soon after its earnings release. When no such deal appeared, the market took it as good news. Cheng described the mere absence of the bond issue as a direct trigger for tighter spreads on AI-related debt. A credit spread is the gap between the yield on a company's bonds and that of government debt with a similar maturity; a narrower spread signals greater investor confidence in the issuer.
Paul Meeks, head of technology research at Freedom Capital Markets and a CNBC contributor, said the recent trading shows investors concluding that "credit fears may have been overblown." He expects that improved mood, which he characterized as better rather than good, to hold as companies report over the next few weeks.
Spreads remain wider than a year ago
Even with the recent easing, CDS spreads sit well above where they stood a year ago, reflecting a wave of debt issuance and free cash flow turning negative across the AI sector. Meta's CDS spread is still up 177% year to date, and Amazon's has risen 129%, CNBC reported.
Jordan Chalfin, an analyst at CreditSights, attributed the moves largely to market mechanics and mood rather than company fundamentals, estimating that technical and sentiment factors account for about 80% of the shift.
The next hurdle comes as Alphabet and Amazon update their capital spending plans and free cash flow forecasts. Both companies reported negative free cash flow in the second quarter, and analysts expect the pattern to have continued. FactSet consensus estimates cited by CNBC point to Alphabet posting negative free cash flow of $2.3 billion alongside $55.2 billion in capital expenditures for the third quarter. Amazon is expected to report negative free cash flow of $9.9 billion against $58.7 billion in capex.
S&P Global Ratings projected in an August report that the hyperscalers would run negative free operating cash flow in both 2026 and 2027.
Cheng said the outlooks will matter more than the headline numbers. He told CNBC that investors are focused above all on where capital spending guidance is heading across the hyperscaler group.
Meeks reads heavy spending as evidence of genuine AI demand. He said the hyperscalers have concluded, based on information they hold that outsiders do not, that the outlay is not merely worthwhile but necessary.
Chalfin does not expect the hyperscalers to announce significant new bond issuance alongside their results. In his view, Oracle's update carries more weight for credit markets than the earnings from Alphabet and Amazon.
Oracle sits closest to the line
Oracle has issued $117 billion in long-term debt and holds an investment-grade rating of BBB-1 from S&P, the lowest tier above junk status. Chalfin called it the most important investment-grade technology credit because it is more strained than the A-rated names. He said Oracle trades more like a high-yield borrower despite its investment-grade label, and that investor concern around the company is considerable.
Apart from Oracle, the hyperscalers' ratings sit comfortably above A, a reflection of diversified revenue, ample interest coverage and room to take on more leverage if they choose.
Cheng said he sees no credit crisis. He pointed to the largest hyperscalers' strong cash generation and liquidity, and said the market is not worried about credit quality at this stage. What concerns investors, he said, is the direction of capital spending needs and the supply of debt needed to fund them — and both are rising.
One complication is that balance sheets do not capture the full picture. S&P Global said in a September report that the companies are using complex off-balance-sheet structures to finance data centers and chips, and that disclosure around them is incomplete. Mark Habib, who leads S&P's digital infrastructure coverage, said on CNBC's "Squawk on the Street" on Monday that commitments such as data center leases and chip purchase agreements are not always treated as debt. S&P is working to give the market a clearer view of those obligations, he said, so investors can see the full scale of what the companies have signed up to.
Watch whether Oracle's Investor Day and the hyperscaler guidance lift or reverse the recent tightening in AI-related credit spreads.
