What Has the AI Sell-Off Looked like for Credit?
Earnings releases by Alphabet Inc. and Tesla on July 23 triggered a broader sell-off among tech stocks, driven by concerns about AI spending and negative free cash flow.1 This was followed by a similar result from Meta Platforms on July 29.2 The credit market's response, by contrast, was much more muted. This makes sense, given that hyperscaler balance sheets are generally so strong that default risk remains extremely remote.3 The exception is Oracle, whose spreads were already elevated relative to those of its peers.
At the same time, the correlation between equity and credit spreads has turned sharply negative for every hyperscaler except Apple. A correlation this strong is unusual for the highest-rated investment-grade issuers — it's more typical in high yield. Equity is conceptually linked to default risk, and therefore to credit spreads, but for the highest-quality issuers, spreads are typically driven by factors other than default risk, since that risk is already so remote. The elevated equity-credit correlation for these top-rated names may instead reflect the heightened investor scrutiny on the multi-asset-class AI trade. If this persists, holders of investment-grade bonds may need to pay closer attention to the equity market — and cross-asset-class investors may find new signals to trade on.
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1 Hannah Erin Lang, Tina Li, and Caitlin McCabe, "Investors Zero In on Runaway Tech Spending, Putting Dent in AI Trade," Wall Street Journal, July 23, 2026.
2 Megan Bobrowsky, "Meta Stock Drops 10% on Steeper AI Costs, Missed Forecast," Wall Street Journal, July 29, 2026.
3 Hyperscalers are defined here as Alphabet, Amazon.com Inc., Apple Inc., Meta, Microsoft Corp. and Oracle Corp.
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