After a prolonged rally, AI-led financial markets have recently begun to lose momentum. On June 5, 2026, the PHLX Semiconductor Sector Index plunged more than 10%, marking its steepest one-day decline since the COVID-19 outbreak in March 2020. South Korea’s stock market has triggered circuit breakers nine times this year. Meanwhile, Taiwan’s TAIEX, which has a correlation of more than 0.98 with the PHLX Semiconductor Sector Index, has recently been battling to hold the 40,000-point threshold.
Lee-Rong Wang, a consultant at the Center for Economic Forecasting of the Chung-Hua Institution for Economic Research (CIER), believes the challenges facing AI-led financial markets extend beyond the financial concerns most widely discussed, including cash flow and debt financing. They also encompass broader social concerns such as heavy electricity and water consumption and the unequal distribution of resources. However, this article does not examine issues related to AI technology or safety.
In the United States, New York became the first state to act in mid-July by imposing a one-year moratorium on new hyperscale data centers. The move was driven mainly by concerns that AI has become a voracious consumer of electricity and water. U.S. media have also reported that only 14% of Americans support building data centers in their communities. Beyond excessive power consumption, residents believe these facilities primarily serve technology giants such as Microsoft, Meta Platforms, Amazon, and Alphabet. Information technology stocks in the S&P 500 have gained about 187% over the past five years. By contrast, the ProShares S&P 500 Ex-Technology ETF (SPXT) rose only about 45% over the same period.
Consultant Wang noted that Taiwan Semiconductor Manufacturing Company (TSMC) Chairman and CEO Che-Chia Wei said bluntly in mid-July that AI demand has tightened supply only for power management integrated circuits and sensors. His remarks dispelled hopes of a broad recovery in mature process technologies. They also implicitly underscored the critical role of electricity supply in AI’s future development.
On the financial front, chipmakers continue to report strong profits amid persistent supply shortages. Yet major cloud-computing providers and technology giants are spending hundreds of billions of dollars annually to build AI infrastructure. These expenditures are no longer funded entirely through internal cash flow, as the companies have begun borrowing. Cash flow at companies including Microsoft, Amazon, and Google parent Alphabet has turned negative. This has renewed market concerns that massive investments by AI companies may fail to generate adequate returns. It may also weaken investors’ long-term appetite for AI-related stocks.
Consultant Wang cited BondCliQ data showing that credit spreads on corporate bonds issued by hyperscale cloud service providers with more than 10 years remaining to maturity have widened markedly. On an issuance-weighted basis, the credit spread on these companies’ 10-year bonds is now about 121 basis points above U.S. Treasury yields. By comparison, the average spread on investment-grade corporate bonds in the ICE BofA US Corporate Index is only about 80 basis points. In other words, AI-related companies carry a higher risk premium than ordinary companies and therefore face higher borrowing costs. More troublingly, the recent decline in AI companies’ share prices will further drive up the interest rates on their bonds.
Another major challenge that could affect AI companies’ borrowing costs is central bank rate hikes. The prolonged U.S.-Iran war has sharply increased threats to Middle Eastern oil shipping routes. President Donald Trump has also recently imposed tariffs on other countries. Global inflationary pressure is therefore continuing to rise, increasing the likelihood of rate hikes by central banks and potentially pushing AI financing costs even higher. On July 30, Taiwan time, the U.S. Federal Reserve announced that it would keep its target interest-rate range unchanged at 3.5% to 3.75%. However, three members of the Federal Open Market Committee (FOMC) advocated a further rate increase. Markets interpreted the outcome as hawkish because inflation remains well above the Federal Reserve’s 2% target. Since the U.S.-Iran war began in late February, the eurozone, Japan, South Korea, Australia, and New Zealand had all raised interest rates by July 26.
Consultant Wang said the worst potential challenge may not yet have fully emerged: rising government debt could exert further upward pressure on sovereign bond yields worldwide. U.S. Secretary of Defense Pete Hegseth told a Senate hearing that the United States had spent US$37.5 billion on the war in Iran, about US$8 billion more than the Trump administration’s May estimate of US$29 billion. Government debt in major economies such as the United States and France grew far faster than GDP in 2025. Japan’s government debt climbed to 212.5% of GDP, the highest level in the world. Japanese Prime Minister Sanae Takaichi’s policy of “responsible and proactive fiscal policy” has also raised concerns about the country’s fiscal outlook.
The Institute of International Finance (IIF) warned that persistently high fiscal deficits, combined with heavy corporate bond issuance to finance AI infrastructure and other projects, could drive global debt still higher in 2026 and threaten financial stability.
Source: Lee-Rong Wang (July 31, 2026). Challenges Facing AI-Led Financial Markets. Commercial Times. https://money.udn.com/money/story/5629/9661772