Global equity markets are ending a difficult week on a more stable footing, but the divergence between regions has been interesting.
US and Asian equities have borne the brunt of the sell-off, after hotter US CPI pushed Treasury yields higher and renewed concerns about the financing behind the AI boom. The Nasdaq has been particularly vulnerable as investors question whether future AI returns can justify both elevated valuations and increasingly expensive borrowing costs. CoreWeave became the focal point of those concerns after yields on some of its debt moved into distressed territory, triggering a broader reassessment of highly leveraged AI infrastructure plays.
Europe has been the notable outperformer. Part of that reflects what had previously been considered one of the region’s weaknesses: its relatively low exposure to the AI trade. European indices have greater weightings towards healthcare, financials, industrials and other value and defensive sectors, leaving them less exposed to the sharp repricing in long-duration technology stocks. Lower valuations have also offered some insulation from the rise in global yields. This doesn’t remove Europe’s structural challenges around growth, fiscal pressures and politics, but this week has demonstrated the value of diversification when the concentrated US technology trade comes under pressure.
There was some relief for the AI trade towards the end of the week after Nvidia CEO Jensen Huang pushed back against concerns surrounding CoreWeave, arguing that its financial position is improving and that Nvidia does not need to provide an additional financial backstop. CoreWeave subsequently recovered from its lows and Asian technology stocks rebounded on Friday. That has helped calm some of the immediate fears, but it doesn’t completely resolve the bigger question the market is beginning to ask: how sustainable is an AI infrastructure boom increasingly reliant on large amounts of debt when the risk-free rate is above 5%? Huang’s comments may have reduced the sense of immediate crisis, but upcoming Big Tech earnings will still need to demonstrate that the enormous investment in AI is translating into sufficient revenue and cash flow to justify the cost.
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