AI Selloff Spreads to Credit Markets as Oil Surge Adds to Wall Street’s Woes

AI Selloff Spreads to Credit Markets as Oil Surge Adds to Wall Street’s Woes

TREE NEWS reports: Wall Street faced a dual shock this week as growing concerns over AI infrastructure financing collided with a sharp rise in energy prices. The Nasdaq 100 tumbled 5.5% for the week, its worst weekly performance since the tariff turmoil of April 2025. The semiconductor sector extended its losing streak to eight consecutive sessions—the longest since 2008—with a cumulative decline of about 16%. Cloud computing provider CoreWeave became the focal point of the selloff, with some of its bonds briefly yielding over 15% on Thursday, a level typically associated with financial distress. Its shares fell another 12% on Friday, bringing the total decline from this year’s high to over 50%.

Meanwhile, Brent crude settled near $110 per barrel, the highest since May, while WTI jumped 3.8% in a single day to $101.71, marking a seventh straight daily gain. The oil rally intensified inflation worries, pushing the 10-year Treasury yield up to 5.097% and undermining the traditional safe-haven appeal of bonds. The core shift this week is that the AI trade’s main narrative has moved from computing demand growth to financing costs, capital expenditure returns, and corporate profitability. Two major risks—AI bubble valuation concerns and energy-driven inflation—unleashed simultaneously, putting pressure on stocks, bonds, and credit markets.

AI Debt Risk Emerges

CoreWeave’s credit deterioration was the immediate trigger for the selloff. The company’s debt-financed model for building AI data centers came under intense scrutiny. The market-implied probability of default for some of its bonds has risen to about 60%, placing its credit risk in distressed territory. Concerns are not limited to CoreWeave alone. Mark Malek, Chief Investment Officer at Siebert Financial, warned that tightening financing channels for emerging cloud providers could become a “very disturbing hurdle” across the tech supply chain. “Now we’re seeing that financing itself will become a scarce resource and will affect the supply chain,” he said. Dennis Follmer, CIO at Montis Financial, which manages about $1.4 billion, also expressed caution about the debt levels of hyperscalers. “A lot of the market’s worry comes from the borrowing scale of hyperscalers—they have burned through much of their cash flow before needing to borrow,” Follmer said. “I do think this will cause some trouble in the future.” JPMorgan strategists noted that the current AI trade has weaker foundations for recovery compared to the July selloff—retail buying is weaker, short positions available for squeezing are smaller, and corporate buyback support is relatively limited.

Chips and Memory Hit Hard

The selloff extended from cloud computing to the entire AI supply chain. The Philadelphia Semiconductor Index fell for an eighth straight session, the longest losing streak since the 2008 global financial crisis. The memory concept index dropped 6.28% for the week. SK Hynix ADRs fell over 6.5% in a single day, Micron Technology dropped more than 5.6%, SanDisk fell over 6.8%, and optical communications company Coherent lost more than 7%. An ETF tracking DRAM memory chips plunged 19% this week, the largest weekly decline since its inception in April, and has seen eight consecutive weeks of net outflows. South Korea’s KOSPI index plummeted 14% for the week, the worst weekly performance since the 2008 financial crisis, and is down over 37% from its summer peak. The proportion of respondents citing “long global semiconductors” as the most crowded trade fell to 45% from 82% in July—though still the most crowded. Michael O’Rourke, Chief Market Strategist at JonesTrading, said bluntly: “The market has priced in a bubble premium for AI companies, and that bubble is starting to deflate.”

Oil Surge Undermines Safe-Haven Logic

In energy markets, Brent crude rose to about $110 per barrel this week, the highest since May. WTI gained 3.8% in a single day to $101.71, rising for a seventh consecutive session. A bipartisan group of US lawmakers proposed legislation to block a Russian diesel market access agreement between the Trump administration and Moscow, adding geopolitical support to oil prices. The oil rally triggered a chain reaction in the bond market. Previously, even two consecutive higher-than-expected inflation readings failed to stop investors from flocking to Treasuries as a safe haven during stock selloffs. But with oil surging, inflation concerns reignited, pushing the 10-year Treasury yield to 5.097%, reversing a three-day decline. The safe-haven property of long-term bonds was clearly eroded on Friday. Fed Chair Warsh declined to provide any guidance on the October rate meeting outlook at an IMF event in Bangkok, leaving markets further lacking policy direction. Nevertheless, long-term Treasuries, as measured by the TLT ETF, still recorded one of their stronger weeks of the year. Follmer said his team has begun reducing duration risk, partially replacing traditional fixed-income holdings with catastrophe bonds.

Divergence: Selling and Bottom-Fishing

Despite rising panic, the market has not seen indiscriminate risk clearing. Investment-grade credit spreads remain near the tight end of their five-year range, and some ETF investors are buying the dip. Cathie Wood’s ARK Investment Management took the opportunity to increase holdings in CoreWeave and Cerebras Systems. Wood compared current anxiety over CoreWeave’s borrowing costs to the earlier pressure on Coinbase bonds, which later benefited from the industry’s overall growth. Keith Lerner, Chief Investment Officer at Truist Advisory Services, maintained an overweight position in tech, believing most negative information is already reflected in prices and some valuations are near historical lows. The real test is approaching. In the coming weeks, tech giants will report earnings, and investors will scrutinize whether AI-related revenue can match escalating capital expenditures. Meanwhile, the upcoming US midterm elections add further uncertainty to cross-asset pricing. As Mark Malek put it: “This is a necessary stage for any industry to mature.”

Key Takeaways for Investors

• AI trade is repricing: The focus has shifted from growth to financing costs and profitability. Companies with heavy debt loads, like CoreWeave, face heightened scrutiny. Investors should assess balance sheets and cash flow sustainability.
• Energy-induced inflation risk: Rising oil prices are feeding inflation expectations, pushing bond yields higher and challenging the safe-haven status of Treasuries. Portfolio duration should be managed carefully.
• Sector rotation: Semiconductors and memory chips are experiencing a sharp correction. While some see buying opportunities, the crowded trade is unwinding. Diversification is crucial.
• Upcoming catalysts: Tech earnings and US midterms will provide direction. Volatility is likely to persist, so maintain a long-term perspective and avoid panic selling.