Fed's Bowman warns of a large equity correction if AI investment returns disappoint

Federal Reserve Vice Chair for Supervision Michelle Bowman has warned that a "large correction in equity valuations" could follow if returns on artificial intelligence investment fall short of expectations. Her November 10 speech in Washington is drawing attention as Anthropic's record-setting IPO approaches.

Debt and external financing

Bowman said the boom in data center investment has become a major influence on the U.S. economy. AI revenues are rising quickly, she said, but are not yet sufficient to pay for maintaining existing models and data centers while developing new ones. As capital spending surges, hyperscalers and other firms are increasingly tapping credit and equity markets, and the cost of that financing has been rising notably.

As reported by Econotimes and others, Bowman said AI-related borrowing across corporate bonds, private credit and project finance is on track to exceed $800 billion in 2026, and potential payments tied to long-term leases, contracts and residual-value guarantees could be more than three times that amount.

How the risk could spread

Bowman said the risks appear concentrated in a few large firms, including AI labs and hyperscalers. If AI revenues fall short of sharply rising costs, the result could be a sharp correction in equity prices for AI firms, higher financing costs and reduced access to credit. "Lower equity prices could undermine the resilience in consumer spending," she said, while higher private long-term rates could strain housing and small business investment. She added that recent drops in tech valuations and wider corporate bond spreads may already reflect investors reassessing expected returns.

Bowman framed the scenario as a risk, not a prediction, and said AI investment is currently supporting growth and should eventually raise productivity and lower production costs.

Timing with Anthropic's IPO

Semafor noted the warning came as Anthropic updated its prospectus, with the IPO set to price on November 18 and begin trading the next day. Nomura's Tore Opsahl said any wobbles around the listing "might mean a selloff of the AI theme."

Sources: Federal Reserve, Bloomberg Law, Semafor