Fitch Says: AI Market Correction Could Be a Big Risk to Corporate Credit. That Might Be Bad News for This Junk Bond ETF.

The artificial intelligence (AI) boom is expensive. AI hyperscalers are spending a lot on AI capital expenditures, and they're borrowing heavily to do it. According to Morgan Stanley research from June, worldwide AI-related corporate debt issuance is expected to reach nearly $570 billion in 2026.

On July 27, Fitch Ratings issued a report estimating that AI-related investment added 1.4% to U.S. gross domestic product (GDP) growth in the first quarter of 2026. The sheer amount of AI-related capital investment could pose risks not just to the U.S. stock market but also to the overall U.S. economy, consumer spending, and, ultimately, to corporate credit and the bond market.

If AI turns out to be as successful as investors believe, then all this corporate borrowing won't be a problem. But if the hoped-for returns from AI-related debt don't materialize, that could be bad news for bond investors.

Let's look at why Fitch sees potential risk in the credit market and what type of corporate bonds might be most vulnerable.

Image source: Getty Images.

Fitch sees "highly uncertain" potential for AI technology

The AI boom has been the biggest story of the U.S. stock market since November 2022, when ChatGPT debuted. More than 1 billion people use AI tools every month, and some of the world's largest and most profitable companies have made a big bet on the future of AI.

But recently, some investors have grown concerned that the AI boom might be overheated. Major tech companies are spending hundreds of billions on AI data centers, semiconductors, and digital infrastructure to build AI tools that might ultimately prove unprofitable. As the Fitch report says, "the medium- and long-term potential of the underlying technology is highly uncertain, as with previous tech cycles."

In the case of what the Fitch report calls "re-evaluation of long-run returns potential" for AI, there could be harmful effects to corporate credit. If major tech companies borrow too heavily to build AI technology that doesn't pay off, this would hurt their bondholders as well as their stock investors. And a downturn in the corporate bond market would also hurt less credit-worthy issuers of high-yield corporate bonds, aka "junk bonds."

State Street SPDR Bloomberg High Yield Bond ETF (JNK): 1,233 corporate bonds, 3 years of 8.56% annualized returns

The State Street SPDR Bloomberg High Yield Bond ETF (NYSEMKT: JNK) holds a portfolio of 1,233 U.S. high-yield corporate bonds. These bonds have credit ratings that mark them as below "investment grade," also known as "junk." This type of debt is generally considered riskier than investment-grade corporate bonds. The companies must pay a higher interest rate to the bond investors who buy their debt.

Higher-yield bonds can bring higher returns to investors. As of July 30, this bond ETF was earning a 30-day Securities and Exchange Commission (SEC) yield of 6.76%. It has delivered annualized returns (by net asset value) of 5.99% in the past year, 8.56% in the past three years, and 3.59% in the past five years.

Why buy JNK, or not

The past few years have been good for junk bond investors. The State Street SPDR Bloomberg High Yield Bond ETF has outperformed the Vanguard Total Bond Market ETF (which holds only investment-grade bonds) for the past 10 years.

JNK Total Return Level data by YCharts.

And this junk bond fund is broadly diversified across sectors; most of its bonds are not in AI-related companies. But if the AI-driven tech sector goes into a downturn and leads to an economic slowdown and sell-off in corporate bonds, that could make junk-rated companies more likely to struggle to pay their debts.

With so much AI-related corporate debt flooding the market, alongside the chance of rising interest rates, junk bond investors should be cautious. This bond ETF might be vulnerable to underrated risks. I wouldn't rate it as a strong buy for most investors.

Ben Gran has positions in Vanguard Total Bond Market ETF. The Motley Fool has positions in and recommends Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.