AI Debt Fears Ease as Oracle, Alphabet and Amazon Updates Loom

Worries about the mounting debt tied to artificial intelligence have eased after a period of volatility, but more tests are on the way. Oracle holds its Investor Day on Wednesday, while Alphabet and Amazon.com are due to report quarterly results after the market close on Wednesday and Thursday, respectively.

Credit markets have been on edge over a flood of AI-related borrowing. Meta Platforms announced plans on Monday for a $95 billion stock offering, which helped pull down its credit-default swap spreads. Those spreads had climbed last week after the company reported negative free cash flow in the third quarter. Other CDS spreads also rose and have since retreated.

Richard Cheng, head of Nuveen's investment-grade corporate sector team, said investors had expected Meta to launch a large bond deal soon after its earnings. Its absence was a relief. "Just the absence of the bond deal itself is a direct catalyst for AI-related spread tightening," he said. A credit spread is the yield gap between corporate bonds and Treasurys of similar maturities, and tighter spreads signal growing confidence in the issuer.

CNBC contributor Paul Meeks, head of technology research at Freedom Capital Markets, said recent trading suggests "credit fears may have been overblown." He expects the improved mood, "maybe not good but better," to continue as companies report results over the next few weeks.

Even so, spreads remain wider than a year ago because of heavy debt issuance and negative free cash flow across the AI sector. Meta's CDS spread is up 177% year to date, and Amazon's has gained 129%. Bond yields also remain elevated. CreditSights analyst Jordan Chalfin said the moves are "not necessarily fundamentals," estimating they are about 80% driven by technicals and sentiment.

Alphabet and Amazon are the next big hurdle as they update capital spending plans and free cash flow forecasts. Both reported negative free cash flow in the second quarter, and analysts expect that to have continued. FactSet consensus estimates call for Alphabet to post free cash flow of negative $2.3 billion against $55.2 billion in capital expenditures, and for Amazon to report negative $9.9 billion against $58.7 billion. Microsoft also reports Wednesday but has not issued bonds to fund its AI spending. S&P Global Ratings estimated in August that the hyperscalers will have negative free operating cash flow in 2026 and 2027.

Cheng said the outlooks matter more than the quarterly figures. "The singular focus on the investors' minds is really what the capex guidance trajectory looks like across the hyperscaler space," he said. Meeks sees elevated spending as evidence of strong AI demand, saying the companies have concluded it is not just worthwhile but required.

Chalfin does not expect major new bond issuance around the hyperscalers' earnings. Oracle may be more consequential for credit markets. It has issued $117 billion in long-term debt and holds an investment-grade rating of BBB-1, the lowest level above junk, according to S&P. Chalfin called it the most important investment-grade tech credit, saying it trades more like a high-yield credit and draws considerable investor concern.

Balance sheets also may not show the full picture. S&P Global said in a September report that the companies use complex off-balance sheet arrangements for data centers and chip financing and are not fully transparent. Mark Habib, digital infrastructure sector lead at S&P Global Ratings, said on CNBC's "Squawk on the Street" Monday that some data center leases and chip purchase commitments are not necessarily treated as debt. S&P is trying to give the market more visibility into them.

Apart from Oracle, hyperscaler ratings sit comfortably above A levels, reflecting diversified revenue, ample interest coverage and capacity to take on more leverage. Cheng said there has been some credit repricing but no credit crisis. "The market is really not concerned about credit quality at this point," he said, adding that the trajectory of capex needs and the supply of debt to fund them are both pointing up.