Last week’s decline in equities appeared to be driven more by rotation and hedge fund de-risking than a broader deterioration in fundamentals. The S&P 500 fell 0.5% for its second consecutive weekly loss, while the Nasdaq declined 0.7%. High-yield credit spreads have widened by roughly 60 basis points over the past month, as higher rates and stretched balance sheets at companies like CoreWeave raise questions about the pace of the data center buildout. The concern centers on the more debt reliant part of the AI buildout as data center operators and cloud providers, such as CoreWeave and Oracle, that have borrowed heavily to fund capacity ahead of the revenue it’s meant to generate. There are also growing questions about how quickly AI revenue will materialize. CoreWeave, for example, generally gets paid only once it delivers capacity to customers, so construction delays or softer demand would push out the cash flow needed to service its debt. That uncertainty is what bondholders are pricing in through a higher risk premium. If tighter financing forces these companies to slow or delay their buildouts, chip and infrastructure suppliers would see orders pushed out, weighing on the growth investors have been pricing in. That explains why the selling has spread to semiconductor and infrastructure names. Meanwhile, investors have rotated into defensive sectors such as consumer staples and healthcare. That shift shows up in the gap between the equal-weight S&P 500, which is up roughly 4% month to date, while the cap-weighted S&P 500 is slightly negative. Because the cap-weighted index is dominated by the largest AI-linked names, the divergence, for the moment suggests that weakness is concentrated in that group rather than spread across the broader market.
Looking at this week, the main macro event is the Federal Reserve meeting on Wednesday, where market participants are all but expecting a hawkish hold. Additionally, several Mag 7 companies are reporting this week including MSFT, GOOGL, and AMZN. The AI funding concern will likely continue to be a central theme in the near-term given higher for longer rates. While a slowdown in AI spend would most likely be a positive tailwind for the hyperscalers, a moderation in capex growth would likely result in slower earnings growth for the AI beneficiaries such as semis, industrials, and utilities companies, even if absolute spend remains elevated. We’ve already seen a pullback in many of these beneficiary names but it’s possible that they will continue to be susceptible to changes in capex forecasts.
Higher Borrowing Costs Begin Weighing on Tech
For most of 2026, the technology sector appeared largely immune to the higher-rate environment that was starting to weigh on other parts of the market with higher debt profiles; however, that began to change when investors turned their attention to the neoclouds. Simply put, the business model for the neoclouds is one of large upfront capital investment, often financed through debt, to buy compute, which is then rented to customers who need to run AI but don’t want to build their own data centers. That business model works if customer demand remains strong and cost pressures don’t squeeze out cash flows, but the latter is what was under question for neocloud CoreWeave, which has a debt-to-equity ratio of 1027% and saw some of its bond yields reach as high as 15%. That combination of a highly leveraged business model amid rising borrowing costs spread anxiety to other players such as Elice in Korea and other smaller firms looking to go public internationally. The question now becomes how higher borrowing costs will impact the over $1 trillion in AI spending expected in 2027 and beyond. For large hyperscalers with well-capitalized balance sheets, borrowing costs have risen but remain manageable. Meanwhile, for neoclouds and smaller AI infrastructure firms with weaker credit profiles, borrowing costs remain much higher, as seen in high-yield credit spreads widening in the past month. Higher borrowing costs can limit spending on AI infrastructure, but it will still be crucial to watch whether lower spending revisions become a broader trend moving forward or remain concentrated among smaller, more vulnerable firms.
Lido Advisors, LLC is an SEC-registered investment adviser. Please note that SEC registration does not denote any particular competence or ability and no inference to the contrary should be made. For complete information on the services we provide and our fees, please review our Form ADV at adviserinfo.sec.gov, call 800-301-LIDO, or mail us at 1875 Century Park East Suite 950, Los Angeles, CA 90067.
The information contained herein reflects Lido’s views as of the date of this newsletter. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. Lido has obtained the information provided herein from various third-party sources believed to be reliable but such information is not guaranteed. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Lido is not responsible for the consequences of any decisions or actions taken as a result of information provided in this newsletter and does not warrant or guarantee the accuracy or completeness of this information.
Past performance is not indicative of future performance. The information in this report is for informational purposes only and should not be relied upon as the basis of an investment or liquidation decision. Nothing in this report shall be construed to be a solicitation to buy or offer to sell any security, product or service to any non-U.S. investor, nor shall any such security, product or service be solicited, offered or sold in any jurisdiction where such activity would be contrary to the securities laws or other local laws and regulations or would subject Lido to any registration requirement within such jurisdiction. All content herein has been obtained from sources deemed to be reliable, but is subject to unintentional errors, omissions and changes without notice, and is not warranted as to its accuracy or completeness. You should not rely on the information contained herein, and should rely solely on, and carefully read, the appropriate offering and related subscription materials relating to any specific investment product before making any investment decision.
Not all investments are suitable for all clients. It should not be assumed that any security listed or any recommendations made in the future will be profitable or without loss, including risk of loss of principal, or will equal any prior performance. All investments involve the risk of potential investment losses including the potential risk of loss of principal as well as the potential for investment gain. Further, the prior performance figures indicated herein represent portfolio performance for only a short time period and may not be indicative of the returns or volatility each portfolio will generate over a long time period. The performance of the portfolios should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the performance information. Any references to future returns/risk are not promises of the actual return the client portfolio may achieve. Before investing, investors should seek financial advice regarding the appropriateness of investing in any securities of investment strategies discussed. Not all investments are suitable for all investors.
The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.
Lido specifically disclaims any and all liability arising from the information or illustrations presented in these materials and is not responsible for the consequences of any decisions or actions taken as a result.
Lido Advisors, LLC is an SEC-registered investment adviser. Please note that SEC registration does not denote any particular competence or ability and no inference to the contrary should be made. For complete information on the services we provide and our fees, please review our Form ADV at adviserinfo.sec.gov, call 800-301-LIDO, or mail us at 1875 Century Park East Suite 950, Los Angeles, CA 90067.
The information contained herein reflects Lido’s views as of the date of this newsletter. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. Lido has obtained the information provided herein from various third-party sources believed to be reliable but such information is not guaranteed. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Lido is not responsible for the consequences of any decisions or actions taken as a result of information provided in this newsletter and does not warrant or guarantee the accuracy or completeness of this information.
Past performance is not indicative of future performance. The information in this report is for informational purposes only and should not be relied upon as the basis of an investment or liquidation decision. Nothing in this report shall be construed to be a solicitation to buy or offer to sell any security, product or service to any non-U.S. investor, nor shall any such security, product or service be solicited, offered or sold in any jurisdiction where such activity would be contrary to the securities laws or other local laws and regulations or would subject Lido to any registration requirement within such jurisdiction. All content herein has been obtained from sources deemed to be reliable, but is subject to unintentional errors, omissions and changes without notice, and is not warranted as to its accuracy or completeness. You should not rely on the information contained herein, and should rely solely on, and carefully read, the appropriate offering and related subscription materials relating to any specific investment product before making any investment decision.
Not all investments are suitable for all clients. It should not be assumed that any security listed or any recommendations made in the future will be profitable or without loss, including risk of loss of principal, or will equal any prior performance. All investments involve the risk of potential investment losses including the potential risk of loss of principal as well as the potential for investment gain. Further, the prior performance figures indicated herein represent portfolio performance for only a short time period and may not be indicative of the returns or volatility each portfolio will generate over a long time period. The performance of the portfolios should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the performance information. Any references to future returns/risk are not promises of the actual return the client portfolio may achieve. Before investing, investors should seek financial advice regarding the appropriateness of investing in any securities of investment strategies discussed. Not all investments are suitable for all investors.
The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.
Lido specifically disclaims any and all liability arising from the information or illustrations presented in these materials and is not responsible for the consequences of any decisions or actions taken as a result.
