Corporate Leverage in the AI Era
Some investors worry that today’s AI spending boom is stretching corporate finances and raising default risk. How healthy are corporate balance sheets as we move further into the AI investment cycle?
There is some investor anxiety that the current artificial intelligence (AI) investment surge could be putting pressure on corporate finances, which is raising questions about financial resilience and default risk. How healthy are corporate balance sheets as we move deeper into the AI investment cycle?
- While U.S. investment-grade corporate bond issuance has been high this year at $1.5 trillion, it is still shy of 2020’s record $1.75 trillion.1 More importantly, corporate fundamentals relative to outstanding debt are in much better shape than they were during the Internet buildout and bubble in the late 1990s. Today the S&P 500 interest coverage, or earnings before interest and taxes relative to interest expense, is 8.4x, nearly twice as high as the 4.7x it registered in December of 1999. Simply put, companies today generate significantly more earnings relative to their interest obligations, well above the dot-com bubble peak and comfortably higher than their 30-year average.
- As we pointed out in a previous
Alger On the Money, the companies putting in place the AI infrastructure (e.g., data centers and equipment) are in far stronger financial shape than the firms that built the Internet infrastructure over 25 years ago. Indeed, today’s AI hyperscalers (i.e., major cloud service providers) that are funding much of the AI buildout generate strong free cash flow, unlike many telecommunications firms that financed the Internet buildout during the late 1990s dot-com boom.
- In our view, the companies driving most of the AI infrastructure buildout have solid fundamentals, including strong cash flow and healthy balance sheets with sustainable leverage. Importantly, we believe the hundreds of billions of dollars being deployed into AI infrastructure are essential, as hyperscalers remain constrained by limited compute capacity amid surging demand for AI workloads.
1Bloomberg, November 12, 2025.
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Companies involved in, or exposed to, AI-related businesses may have limited product lines, markets, financial resources or personnel as they face intense competition and potentially rapid product obsolescence, and many depend significantly on retaining and growing their consumer base. These companies may be substantially exposed to the market and business risks of other industries or sectors, and may be adversely affected by negative developments impacting those companies, industries or sectors, as well as by loss or impairment of intellectual property rights or misappropriation of their technology. Companies that utilize AI could face reputational harm, competitive harm, and legal liability, and/or an adverse effect on business operations as content, analyses, or recommendations that AI applications produce may be deficient, inaccurate, biased, misleading or incomplete, may lead to errors, and may be used in negligent or criminal ways. AI technology could face increasing regulatory scrutiny in the future, which may limit the development of this technology and impede the future growth. AI companies, especially smaller companies, tend to be more volatile than companies that do not rely heavily on technology.
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