Vanguard’s senior economist Shaan Raithatha warns that the AI capital expenditure boom may carry “hidden risks”.

Hyperscalers are on track to borrow more than $400 billion this year to fund their AI buildouts. That is more than double the $165 billion raised through debt markets across all of 2025.

Vanguard’s economist points to the concern that strong moats and cash flows may be masking the true scale of AI debt exposure; with special purpose vehicles, off-balance-sheet financing and long-term lease obligations increasingly used to fund the buildout in ways that may not be immediately visible to investors.

The Free Cash Flow Problem

Amazon.com Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOGL), Microsoft Corp. (NASDAQ:MSFT) and Meta Platforms Inc. (NASDAQ:META) are projected to spend close to $700 billion combined in capital expenditure this year, a roughly 60% jump from 2025’s already historic levels.

Fund managers are starting to push back. A Bank of America survey of 190 managers overseeing $512 billion in assets found that only 20% now want firms to keep increasing capital spending, down sharply from 34% last month.

Some 30% identified AI hyperscaler capex as the most likely source of a systemic credit event.

Oracle Corp. (NYSE:ORCL) announced plans to raise up to $50 billion this year, half through bonds, and has since seen its stock fall more than 50% from its all-time high.

What Prediction Markets Say

Traders on Polymarket’s AI Bubble Burst by…? market are pricing a 20% probability of an industry downturn by end of 2026.

The market, which has over $1.5m in volume, defines several trigger conditions, including Nvidia Corp. (NASDAQ:NVDA) falling 50% from its all-time high or OpenAI filing for bankruptcy.

The US Recession By End Of 2026? market sits at 24%.

A recession would be the worst possible backdrop for companies betting their balance sheets on AI.

The CDS Market Is Sending A Warning

Net notional CDS outstanding across Alphabet, Amazon, Meta, Microsoft, Nvidia and Oracle has surged from near zero in January 2025 to close to $10 billion by February 2026, per CNBC. Investors are rushing to hedge AI debt exposure using credit derivatives.

Measures of default protection have spiked to levels last associated with the 2009 financial crisis, a sign that sophisticated investors are quietly hedging against scenarios equity markets aren’t pricing.

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