Investors have poured billions of dollars into companies leading the artificial intelligence boom, and a sharp drop in valuations would have dire consequences for the credit market and the broader US economy, according to Moody’s Ratings.
With Big Tech firms set to hit $500 billion in data center investments this year, some investors have warned that the market is too exuberant, creating a speculative frenzy. In a new report, Moody’s analysts led by Vincent Gusdorf stopped short of declaring a bubble, but they do map out a scenario where valuations of AI-related companies fall by 40% in the coming months. The report also describes the “contagion channels” that would funnel the pain to other parts of the economy, from banks and pension funds to the US consumer.
If a bubble were to pop, private credit managers backing AI firms would need to renegotiate lending terms to avoid defaults and pause the deployment of new capital. Losses accrued in private funds — many of which are thinly traded and don’t mark to market — wouldn’t come to light until investors tried to pull out their cash.
“Redemptions from open-ended private-credit vehicles could hit withdrawal limits and trigger suspensions,” the report said. “By the time suspensions are lifted, collateral may have lost substantial value.”
Pension funds holding stocks tied to AI technology and infrastructure would also be at risk, Moody’s said, especially since many have shifted to passive investing strategies. A market crash could create litigation risk for insurers. Meanwhile, US consumers could pull back on spending, feeling poorer after the drop in the equity market.
The spillover risk is due in large part to the various ways the AI boom has been funded. Lenders across private and public markets have invested in AI companies directly, along with the buildout of data centers that power the technology. Private credit firms, which tap banks and other investors for cash, are some of the biggest financiers of the industry.
In the first half of 2025, more than half of all invested venture capital funds went to AI startups, Moody’s said. And while banks rarely lend to such firms directly, they do provide leverage to private credit and private equity, potentially leaving them exposed as well, the report said.
A weak earnings report from an AI giant and increased doubts that AI labs — like OpenAI or Anthropic — will generate significant cash flow are among the catalysts for a bubble popping, according to the ratings agency.
To be sure, the credit impact for big tech firms like Microsoft Corp. and Alphabet Inc. would be limited, given their diversified business models, Moody’s said. In fact, those companies would have an opportunity to buy AI startups at a discount if the bubble burst.
“I don’t think it’s realistic to think that the hundreds of players that are making aggressive bets in this area are all going to be the winners,” Jeff Blazek, Neuberger Berman’s multi-asset Co-CIO, told Bloomberg TV last week.
“It’s probably going to be a streamlined, small handful of companies that will be able to claim the superior returns, which may bode poorly for the other players.”
Written by: Emily Graffeo — With assistance from Romaine Bostick @Bloomberg
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