Who’s Financing the AI Boom? (With Bryan Whalen)

NVIDIA

Across the shows: 35 speakers in other episodes, 29 bullish and 9 bearish calls, past 30 days

• Bryan Whalen · TCW GroupUncertain

  Nvidia financing over 200 customers who buy its products resembles late-1990s tech bubble dynamics.

  Whalen describes self-financing within the AI ecosystem. Nvidia is financing more than 200 companies that effectively buy its products, and he says this may remind investors of the technology bubble of the late 1990s into 2000 and 2001. Combined with heavy optimism and an unproven journey, he sees this as a risk. If the path is disrupted and capital markets push down equity valuations or raise the cost of capital, the companies without non-AI businesses could be hit hardest. He does not say whether he expects Nvidia shares to rise or fall.

  “NVIDIA, I think, this point is financing over 200 different companies, you know, that effectively buy their products, and, you know, that might remind some of us of the technology bubble”at 24:27

Credit markets

• Collin Martin · Charles Schwab

  Triple-C bond spreads have blown out; he is very cautious on the lowest-rated junk bonds.

  Martin says credit spreads overall remain fairly low, though they have ticked up. The exception is the lowest rung of the high-yield market. The Bloomberg high-yield triple-C index's average spread is up 4.5 percentage points year to date, much more than the moves in double-B and single-B bonds. Triple-C total returns are still negative year to date, though less bad than the spread move suggests, because their high income payments offset part of the price decline. He stresses this is not a recommendation to buy triple-Cs and says the team is very cautious on them.

  “The index we track, the Bloomberg high yield triple c corporate bond index, the average spread is up four and a half percentage points year to date.”at 12:19

• Bryan Whalen · TCW Group

  AI-driven issuance is set to roughly double investment-grade corporate bond supply this year.

  Whalen says net investment-grade corporate bond issuance was about $500 billion in 2025 and is expected to double this year. Almost all of that increase is tied to AI and data center capital spending. Hyperscalers had more than $250 billion of combined free cash flow a few years ago. This year their free cash flow is negative, and he expects it to stay negative next year. They have spent cash on data centers, chips and power, then turned to bond markets. Estimated data center capex is about $800 billion this year, and roughly half is expected to be financed through capital markets, mostly corporate bonds, because ABS and CMBS markets are not deep enough.

  “this year, it's expected to double, and I would say almost the entirety of that doubling of issuance has been in the AI slash data center required capital spend”at 19:38

• Bryan Whalen · TCW Group

  Hyperscaler unsecured bonds yield 110-130bp over Treasuries, attractive versus average corporate bonds.

  Whalen says hyperscaler unsecured debt used to trade very tight to Treasuries, but heavy issuance and a little extra leverage have pushed spreads wider. Hyperscaler bonds now trade about 110 to 130 basis points over Treasuries, versus roughly 75 basis points for the average corporate bond. He says this looks like an attractive yield and carry play. He expects borrowing to continue for at least the next twelve months, so the spread may not tighten soon. TCW is starting to dip its toe in the water, moving from roughly neutral toward about one-third of its maximum overweight to AI-ecosystem risk.

  “the debt of these companies trades wider than your average corporate bond. ... you're going to buy hyperscaler unsecured debt somewhere between, you know, 110 or 130 basis points over treasuries.”at 27:47

• Bryan Whalen · TCW Group

  AI data center project bonds carry hidden construction risk and are not worth buying at current prices.

  Whalen describes structured deals that finance data centers through special-purpose borrowers before a hyperscaler signs a lease. The borrower is often a property owner or construction company, not the hyperscaler, and the risk sits there for the one to two years of construction. If the AI build-out hits a snag, or the data center is not needed, these bonds could fall sharply. The deals average about $15 billion, there have been over 30, and most are below investment grade and not index-eligible. Given the excitement in the market and the thin pricing for downside, TCW is keeping its powder dry and waiting for a better entry point.

  “And just given the amount of excitement and euphoria and very little pricing for something that might go wrong, we're kind of keeping our powder dry in most of these investments and waiting for a better entry point.”at 31:54

• Bryan Whalen · TCW Group

  Very defensive on corporate bonds; wait for a better entry, given AI-concentrated risk.

  Corporate bond spreads do not compensate for the AI-concentrated risk: hyperscalers keep borrowing regardless of price, and the AI build-out creates concentrated exposure. TCW is defensive and sees the right move as waiting for wider spreads before buying.

  “We are very defensive on corporate bonds. I think that's a great trade right now. Wait for a better entry point for the reasons I already talked about, particularly with regards to AI”at 43:52

• Bryan Whalen · TCW Group

  Securitized credit offers corporate-like or better spreads without the AI concentration risk.

  Agency mortgage-backed securities, some asset-backed securities and some commercial mortgage-backed securities offer similar or slightly higher spreads than corporate bonds. Unlike corporates, they lack the concentrated AI exposure that drives the risk in corporate credit, which makes them better value now.

  “agency mortgage backed securities, some asset backed securities, some commercial mortgage backed securities. They offer similar, if not a little bit more spread than corporate bonds, but they don't have that same type of AI concentrated type of risk”at 44:05

AI infrastructure & data centers

• Liz Ann Sonders · Charles Schwab

  Some firms are reining in AI spending as costs rise without measurable productivity or margin gains.

  Sonders says that in earnings season she will watch AI-related capex closely for any slowdown caused by pricing, equipment costs or supply constraints. She also wants analysts to quantify AI adoption at companies, including the spend, the gap between cost of capital and return on invested capital, and cost pressures. She says there is more than anecdote now: some companies have decided to rein in AI spending because costs were rising without a clear productivity or profit-margin payoff. She is as focused on AI adopters as on the enablers building the infrastructure.

  “Some companies saying they have decided to rein in the spending a little bit because the cost of that spend was going up without being able to precisely quantify from a productivity or a profit margin standpoint.”at 15:10

• Bryan Whalen · TCW Group

  The AI data center capex boom is unprecedented and risks overspend, as past tech booms did.

  Whalen argues the AI-driven capital spending boom over the past two years is the largest ever, measured against canals, railways and the fiber build-out of the internet boom. Once adjusted for present value, the rate of spending is unprecedented. He says those earlier booms were transformative but also shared an overspend. Investors are rushing in, and the debt markets are pricing the buildout as if it will not overspend. He is not questioning the technology's revolutionary potential. He is saying the path could take an unexpected turn.

  “what we've seen over the past literally twenty four months is probably the biggest boom in capital spending we have ever seen in not just our lifetimes”at 18:19

• Bryan Whalen · TCW Group

  Hyperscalers' large non-AI businesses make them safe even with more leverage; non-AI ecosystem firms at risk.

  Whalen separates the AI ecosystem into hyperscalers with large, proven non-AI businesses and the hundreds of companies with no non-AI businesses. He says the hyperscalers' balance sheets look far weaker than they did a few years ago but still look sound. Their non-AI businesses can absorb a disruption to the AI journey, so they are not the concern. The concern is the non-AI companies orbiting AI, which he says will suffer. He believes that risk is not priced into the ecosystem. TCW is starting to be interested in the unsecured debt of some hyperscalers after their underperformance and heavy issuance.

  “we're not concerned about these hyperscalers. These businesses are going to be fine. Even with higher amounts of leverage, they have a strong robust non AI business to handle a disruption in the AI journey”at 25:08

• Bryan Whalen · TCW Group

  Hyperscalers are price-insensitive to borrowing costs because expected AI returns dwarf financing costs.

  Whalen says the bond market normally forces heavy borrowers to pay more, which eventually chokes off borrowing. Hyperscalers started with pristine balance sheets and are still healthy after this borrowing. He argues their expected returns from the data centers and chips are so optimistic that the difference between borrowing at 6%, 7% or 8% is a rounding error. If they are right, the equity return from the AI investment will dwarf the extra cost of capital. He admits they may not be right, and the point is that the companies care more about getting the capital than its cost.

  “If they're correct, it's going to make the difference between borrowing at 6% or 7% or quite honestly, 8% literally a rounding error in the math.”at 34:55

• Bryan Whalen · TCW Group

  Hyperscalers' AI spending is insensitive to rising Treasury yields and wider spreads; it keeps going.

  Hyperscalers and the wider AI ecosystem are price-insensitive. Treasury yields have risen this year and credit spreads have widened, but this has not slowed their borrowing or spending. They continue to march forward, so higher rates are not restraining the AI build-out.

  “We haven't seen them detoured by higher rates. They continue to march forward.”at 36:53

US rates & the Fed

• Collin Martin · Charles Schwab

  Hot core CPI supports one more Fed rate hike later this year.

  Martin says one core CPI print is unlikely to move the Fed at its October meeting. Still, he argues it supports the case for one more hike later this year. Core monthly CPI rose 0.3% for a second straight month, and the three-month annualized rate ticked up to 3.4%. New York Fed president John Williams has said he wants core monthly prints of 0.2% or less before he is confident inflation is moving the right way, and two months in a row have come in above that. Williams had recently said one hike by year-end and then a pause seemed appropriate, so Martin wonders whether this data will change that view. He says that if inflation becomes a bigger problem, the Fed would likely act more aggressively.

  “It certainly supports the case for one later this year in our view.”at 3:04

• Bryan Whalen · TCW Group

  The Fed faces two neutral rates: AI-driven demand needs hundreds of basis points more, while the rest of the economy is already strained.

  The AI ecosystem is rate-insensitive, so slowing it would take a policy rate hundreds of basis points above today. Small and mid-sized businesses and price-sensitive consumers already had rates too high entering the year and are suffering more now. The economy is hyper-bifurcated, so the FOMC faces a dilemma: hiking to fight inflation hurts the rest of the economy but barely touches AI.

  “you almost have two neutral rates. You have maybe a neutral rate you need to apply to the AI ecosystem to slow them down... that's probably hundreds of basis points higher from where we are today.”at 37:30

• Bryan Whalen · TCW Group

  The Fed likely hikes once more; markets pricing three more hikes is too hawkish.

  The Fed has hiked once and markets price three more over the next year. The oil supply shock is not an economy like 2022: rates started the year elevated and there is little fiscal stimulus in the system. The AI economy is already under some pressure. So the Fed will probably go one more time but not the final two, as the data will show no inflation problem.

  “We don't think the Fed's gonna go as much as the market's pricing in right now... They'll probably go one more time, but we really don't think they'll go the final two times.”at 38:32

• Collin Martin · Charles Schwab

  Schwab expects two more Fed hikes; inflation is not out of control, just slow to fall.

  Schwab's house view sits between the market and the more dovish TCW view. Inflation is not running out of control, and some parts of the economy are doing poorly. The main issue is the timeliness of getting inflation down rather than a potential re-acceleration, which justifies two more hikes.

  “We expect two more hikes, but we're kind of in the same boat that we don't think inflation is necessarily running out of control.”at 40:28

US Treasuries & yields

• Collin Martin · Charles Schwab

  Short and intermediate Treasury yields have little upside; prefers below-benchmark duration.

  Martin expects the two-year and other short-term yields to be range-bound after the CPI-driven spike. Unless inflation clearly reaccelerates, or the Fed signals significantly more hikes than expected, he sees little upside in short and intermediate Treasury yields. His base case is about two more hikes as we look into 2027. Because of that outlook, he still prefers short and intermediate maturities, slightly below the benchmark duration of the Bloomberg Aggregate, which has a duration of about six. He points out that the two-year yield is more tied to near-term Fed expectations, while the ten-year, which rose above 5.3%, reflects longer-term views.

  “Unless that happens, I don't think there's too much upside with short and intermediate term treasury yields from here.”at 6:02

• Bryan Whalen · TCW Group

  Front-end Treasury yields should fall once markets price out two of the priced-in Fed hikes.

  Once the economy's resilience is digested and the data show no inflation problem, markets should price out at least two of the hikes currently priced in. That should produce a bond rally, led by the front end of the curve (two- and five-year Treasuries).

  “the markets will start to price out at least two of these hikes that are priced in, and what you should see is a bull market rates coming down in bonds, particularly led by the front end of the curve, like in the two and the five year”at 40:12

• Bryan Whalen · TCW Group

  Treasuries are attractive: a five-year could return about 10% over 12 months if yields fall back.

  Yields are high enough to offer a strong coupon and a cushion if rates rise a bit more. If rates return to where they started the year, a five-year Treasury returns about 10% over twelve months. Treasuries should also act as a risk-off hedge if equities fall, which suits a diversified portfolio.

  “Your twelve month return on your five year treasury is gonna be 10%... I do think treasuries will give you that risk off positive response if equities get a downdraft.”at 43:24

US inflation

• Liz Ann Sonders · Charles Schwab

  Inflation is broadening beyond oil; about two-thirds of CPI categories run above 3%.

  Sonders looked at the breadth of CPI categories rather than the headline and core prints. A large chunk of categories are running hotter than the Fed's 2% target, and about two-thirds are running above 3%. She argues this shows inflation is not limited to war-driven oil prices. Tariffs, diesel, component prices and the higher cost of the AI build-out are all feeding through, and she says the data is starting to show it. She adds that the annualized core PCE rate may be rebounding from around 2% in August into the high 2s, with the annual rate back above 3%, based on CPI components mapping to PCE.

  “pretty hefty chunk of them are not only running hotter than the Fed's 2% target, but about two thirds of them are running above 3%.”at 1:39

• Bryan Whalen · TCW Group

  Higher energy costs won't pass through to the broader economy or unanchor inflation expectations.

  The current inflation shock is an oil supply shock. The economy lacks the fiscal stimulus and cash-rich consumers of 2022, and rates are already elevated. So higher energy costs will not spread into broader prices or unanchor expectations. As Q4 unfolds, the Fed should see in the data that it does not have an inflation problem.

  “these higher energy costs will not be passed through to broader parts of the economy. It will not unanchor inflation expectations.”at 39:46

US stock market outlook

• Liz Ann Sonders · Charles Schwab

  Profitable small caps are leading; staying up in quality is warranted as rates rise.

  Sonders says higher yields across the curve are visible under the surface of the market, even if the cap-weighted S&P 500 looks resilient. Interest-rate-sensitive areas are lagging. Factors that have worked in small caps include high interest coverage, margin stability, positive forward earnings revisions and reasonable valuations, a version of growth at a reasonable price with an added interest-rate-sensitivity check. Profitable Russell 2000 stocks have doubled the performance of unprofitable ones. Last year the unprofitable names outperformed two to one, so leadership has flipped toward quality. She sees this as a sign that investors need to stay in quality in a rising-rate environment.

  “profitable Russell two thousand stocks have doubled the performance of nonprofitable Russell two thousand stocks.”at 10:49

Earnings & corporate profits

• Liz Ann Sonders · Charles Schwab

  Q3 S&P 500 earnings could beat expectations, though a repeat of Q2's large beat is uncertain.

  Sonders notes Q3 S&P 500 growth expectations are about 30%, and says that figure could move higher. Her reasoning is based on last quarter. Consensus was about 24% going into Q2 reporting, and companies beat it by roughly 30 percentage points, to the low 50% range. She is less sure the spread will be as wide this time, and it is too early in earnings season for meaningful numbers.

  “that has the potential to move higher assuming we see somewhat of a repeat of what we saw last quarter”at 13:35

Software & SaaS

• Bryan Whalen · TCW Group

  Fears that AI will make software and insurance brokers obsolete are forcing credit to be re-underwritten.

  Early in the year the market feared AI would make whole industries such as software and insurance brokerage obsolete. Lenders are now re-underwriting these businesses: they are testing each company's life cycle and whether it can repay its debt. Bryan calls this a healthy fundamental repricing of credit risk, though he admits no one has the answers yet.

  “the market was, I think, doing a healthy thing of trying to re underwrite and calibrate, what's going to go on, what's the life cycle of this business is, can they pay back their debt”at 36:23

US consumer

• Bryan Whalen · TCW Group

  Small and mid-sized firms and the bottom half of US consumers are under pressure into Q4.

  Cost of capital matters most to small and mid-sized businesses and price-sensitive consumers. Higher rates turn a car loan at 8% instead of 7% into no car at all. The non-AI economy was already struggling at the start of the year and has worsened, so hints of pressure should show up in Q4 data.

  “we're gonna start to see a lot of hints that small and mid sized companies are under pressure, that the bottom half of the US consumer is under pressure”at 39:57