- James Russo of AllianceBernstein says the AI trade is at a "critical moment."
- AI infrastructure stocks face risks from rising rates, which could deter borrowing and AI spending.
- Russo expects a "significant deceleration" in hyperscaler capex in 2027 and 2028.
The AI trade is at a "critical moment" as rates in the corporate bond market rise, a top portfolio manager at AllianceBernstein says.
James Russo, who manages the firm's US Strategic Core Equities portfolio, told Business Insider last week that rising yields are making companies increasingly less willing to borrow to fund AI spending, putting AI infrastructure stocks in a perilous position.
"If the financing crunch continues, worsens, and begins to spiral, then it would signal a massive change in the trajectory for the AI trade," Russo said.
A confluence of factors is pushing up borrowing rates.
For one, Treasury yields have soared in recent months, thanks to rising oil prices and their impact on the inflation outlook, and ballooning government debt levels. That spike has caused rates to rise in the corporate credit market, as they're pegged to the risk-free rate.
Huge borrowing demand to fund the AI buildout is also putting upward pressure on rates. As demand for capital is outpacing its supply, borrowers to pay a higher interest rate to compete for the money.
Last week, yields on bonds issued by AI infrastructure company CoreWeave hit 15% as concerns around the company's debt levels fueled fears about the health of the infrastructure boom. Broader default concerns for AI firms are now seeping into the bond market, sending rates for these firms higher.
All of that presents a problem for companies involved in the AI buildout. As the cost of capital rises, any new money borrowed is more expensive. To justify borrowing at higher rates, prospective returns on the investment in AI data centers and other projects need to be large enough.
The less worth it that borrowing to fund the AI buildout becomes, the less spending on AI there may be, Russo said.
If capex growth pulls back meaningfully, the companies benefiting from the spending on the AI could see a reduction in their future expected income. Those fears were at the heart of the sell-off in AI infrastructure names that rocked the market last week.
Russo said he expects a slowdown in AI capex over the next couple of years. Hyperscalers are spending an estimated $725 billion in 2026, and that is expected to grow to as high as $1.2 trillion. But the ultimate growth rate may come in well below what the market expects, Russo said.
"I would expect a significant deceleration in capex growth in 2027, and again further deceleration in 2028," Russo said.
Third-quarter earnings reports for major hyperscalers are just around the corner, and could offer a window into any changes in how these firms are thinking about capex.
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