Global financial markets are facing mounting pressure from geopolitical conflicts, rising government debt and renewed trade tensions. From soaring bond yields in Japan and France to weakening emerging-market currencies, signs of financial strain are appearing across major economies. Now, the massive artificial intelligence investment boom that has helped sustain market optimism is showing signs of vulnerability.
For the past two years, spending on AI infrastructure has supported stock market gains and strengthened expectations for global economic growth. A multitrillion-dollar investment drive, encouraged by the Trump administration’s relatively light-touch approach to business, has helped push equities to record highs and supported forecasts of around 3% global growth this year.
However, investors are increasingly questioning how resilient markets would be if several economic pressures intensified simultaneously. US President Donald Trump’s unpredictable trade policies and the energy shock caused by the Iran war have revived inflation concerns, increasing pressure on central banks to raise interest rates.
Higher borrowing costs are particularly concerning because governments are already carrying substantial debt while technology companies are committing enormous sums to AI infrastructure. The combination is pushing financing costs towards levels not seen in decades.
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With US midterm elections, geopolitical instability and uncertain central bank decisions approaching, economists and investors are warning that the risks to the global economy are growing.
Jim O’Neill, former Goldman Sachs chief economist and former British Treasury minister, said rising interest rates tend to expose the most vulnerable countries and businesses. He warned that if inflation remains elevated, the risks associated with debt-financed investment in AI will become more serious.
Inflation remains above central bank targets. The US Federal Reserve has missed its inflation target for more than half a decade, while euro-area inflation stands at 3.8%, compared with the European Central Bank’s 2% target.
O’Neill said he was surprised that the AI investment boom had not already experienced more significant disruptions.
Financial markets show signs of strain
Market concerns became more visible in October, when investors began moving away from AI-related stocks and towards safer assets.
More than $2 trillion in market value was wiped from the technology-heavy Nasdaq 100 last month. Strong earnings from major technology companies did not entirely reassure investors, who increasingly questioned whether the enormous sums being invested in AI would generate returns quickly enough.
The pressure extended beyond share prices. The cost of insuring bonds issued by some technology companies increased, while several proposed data centre projects struggled to secure financing. Technology stocks across South Korea, China and the United States also suffered losses.
The movement towards safer investments helped push bond yields down from multidecade highs. The US 10-year Treasury yield, a key benchmark influencing borrowing costs worldwide, fell by almost 20 basis points on October 22, marking its largest daily decline since early 2023.
Nevertheless, the yield remains around 5%, a level some investors consider potentially dangerous for broader financial stability.
Financial pressure is also emerging in economies less directly driven by AI investment.
In France, government bond yields have climbed to levels last seen during the 2012 eurozone debt crisis. The increase has further restricted the government’s ability to respond to domestic economic and political demands amid widespread protests and serious civil unrest.
Japan is facing a different combination of pressures. Its dependence on imported energy has increased its vulnerability to rising oil prices, while government bond yields have recently reached 30-year highs. Authorities face growing pressure to increase interest rates more quickly, potentially undermining Tokyo’s plans for additional spending and disrupting international capital flows.
Mike Riddell, a lead portfolio manager at Fidelity International, which manages more than $1 trillion in assets, said there were already signs of financial stress emerging in several economies, including France and Australia. He also pointed to Germany’s government bonds becoming more attractive to investors seeking safer investments.
US economist Paul Krugman has similarly warned that persistent inflation, rising government borrowing costs and vulnerabilities in the AI boom could create serious problems for the American economy.
Despite these concerns, the global economic picture is not entirely negative. Recession warnings over the past two years have repeatedly failed to materialise, European economic indicators have proved more resilient than expected, and labour markets have remained relatively stable.
Corporate earnings have also been encouraging. According to LSEG data, 84% of S&P 500 companies that had reported third-quarter results so far had exceeded analysts’ expectations.
However, strong earnings may not be enough to offset the risks associated with increasingly concentrated market gains and expensive investment commitments.
AI spending has been holding markets together
A significant part of the recent resilience in global markets has come from spending by major technology companies investing heavily in artificial intelligence.
The so-called hyperscalers, a group of approximately half a dozen major US technology firms, are expected to invest around $1.2 trillion in AI infrastructure next year, according to Danske Bank estimates. That would be comparable to the combined investment of all European companies. Their projected spending follows an estimated $900 billion investment this year.
The scale of these commitments highlights how dependent financial markets have become on a relatively small group of companies.
Technology and AI-related stocks account for more than 40% of the S&P 500 and have contributed significantly to the index’s 70% increase over the past five years.
Recent market movements, however, suggest that the gains are becoming less evenly distributed. The S&P 500 has fallen around 3% from its early October peak as investors reassess AI valuations. The Russell 2000, which tracks smaller companies more sensitive to borrowing costs, has declined nearly 8% from its August peak.
Albert Edwards, a global strategist at Societe Generale known for warning about the 1997 Asian financial crisis, has expressed concern about the narrow leadership behind the stock market rally. He argued that market gains have become unusually dependent on a small number of major companies.
Some analysts believe AI investment has helped prevent the US economy from slipping into recession, particularly as the Iran war has driven energy prices higher. If that spending weakens, the consequences could extend beyond the technology sector.
Sheila Bair, who chaired the Federal Deposit Insurance Corporation during the 2008 financial crisis, sees similarities between current financial conditions and the period preceding that collapse.
She pointed to the rapid expansion of lending by parts of the financial sector and the growing dependence of AI companies on debt to finance their ambitions. Higher interest rates could put pressure on these borrowers, exposing weaknesses in their financing models.
Bair also warned that governments have limited fiscal capacity to respond to another major financial crisis because public finances are already under strain.
Geopolitical shocks could intensify the crisis
The economic risks are not limited to financial markets or technology investment. The prolonged Iran war has disrupted oil supplies and pushed energy prices sharply higher, adding another source of pressure to an already fragile global economy.
Oil has reached around $105 per barrel, representing an increase of almost 75% since the beginning of the year. Trump has also indicated that the United States and Israel could resume attacks on Iran after the midterm elections, creating further uncertainty over energy supplies and market stability.
The impact is particularly visible in emerging markets. Currencies in countries including Indonesia and the Philippines have fallen to record lows as higher crude prices increase import costs. Their central banks have been forced to raise interest rates, adding pressure on domestic economies.
The Bank of England warned in its July financial stability report that an unpredictable international environment increases the likelihood of major global shocks. It cautioned that several shocks could interact with one another, producing a combined impact greater than their individual effects.
The concern is especially serious because governments have less room to respond than they did during previous crises.
Global debt has exceeded $350 trillion, a record high, according to the Institute of International Finance. The total is almost three times the size of the global economy, leaving governments with substantial financial obligations at a time when borrowing costs are rising.
Tina Fordham, founder and geopolitical strategist at Fordham Global Foresight, also warned that weakening relations among traditional allies could make international crisis management more difficult. During the 2008 financial crisis, major economies coordinated rescue packages and monetary stimulus to contain the damage.
A similar response could prove harder to organise under current geopolitical conditions. Fordham argued that without comparable international coordination, a crisis on the scale of 2008 could have much more severe consequences for the global economy.
Why an AI slowdown could have global consequences
The international exposure to US financial markets means that a reversal in the AI investment boom would not remain confined to American technology companies.
Foreign investors have significant holdings in US securities, and their net purchases reached nearly $280 billion in August, the highest monthly figure on record, according to the latest Treasury International Capital data.
That exposure creates the potential for a downturn in US markets to spread across international financial systems. If investors begin questioning the profitability of AI infrastructure projects, technology valuations could face further pressure, potentially affecting companies, lenders and foreign investors connected to the sector.
The central concern is that AI investment has become more than a technology-sector growth story. It is now an important source of support for stock market valuations and wider economic optimism.
The scale of planned investment means that a slowdown could affect financing conditions, corporate earnings and investor confidence well beyond the companies directly involved in AI development.
Fordham invoked Warren Buffett’s famous observation that it is only when the tide goes out that investors discover who has been swimming naked. In the current market environment, she suggested, AI represents that tide.
The global economy has so far absorbed wars, trade tensions, rising debt and inflation without experiencing a major financial breakdown. But with markets increasingly dependent on a narrow group of technology companies and governments facing limited room for intervention, the next major shock could prove harder to contain.
Whether the AI boom continues to support global growth or becomes another source of financial instability will depend on whether the enormous investments being made can generate sustainable returns before higher borrowing costs and geopolitical disruptions expose the market’s underlying weaknesses.
With information from Reuters.
