Citadel warns: the tech stock selloff is just the first alarm bell, and the AI trade has "almost no margin for error"

Title context: Citadel warns: the tech stock selloff is just the first alarm bell, and the AI trade has "almost no margin for error" Text: The selloff in tech stocks shows that investors are becoming increasingly demanding about whether massive AI spending will ultimately generate sufficient profits, according to Noshad Shah, head of EMEA fixed income sales at Citadel. Shah wrote: "Given how high a proportion of the current economy and stock market is betting on the AI trade, there is almost no margin for error once other risks begin to emerge." The debate over the pros, cons and dangers of the AI trade continues to heat up among prominent investors: Citadel's Ken Griffin has warned of bubble risk, while Blackstone Inc. (BX.US) President Jon Gray said there is no need for concern because demand is growing "almost parabolically." In a rare interview, Citadel co-chief investment officer Pablo Salame said the enormous capital demands underpinning the AI revolution are colliding with cautious lenders unwilling to bear all the risk. Last week, a sharp unwinding of AI bets sent tech stocks tumbling, while risk-off signals in credit markets climbed to their highest level in more than a year, driven by concerns that rising borrowing costs are compounding with numerous global risks and making financing more difficult. Rising AI credit risk Against this backdrop, Anthropic PBC applied for an IPO on Monday, becoming the first company whose core business is developing AI models to list. Shah said tariffs, fiscal stimulus and elevated energy prices have made both the financing and operating costs of AI investment more expensive, while public opposition to data center construction could slow project timelines and push up costs. Shah said the US has so far been able to absorb these pressures because earnings and confidence remain strong. But a sustained retreat in AI investment and financing could threaten the household wealth that had helped buffer the economy against higher costs. Shah echoed remarks made by Griffin last week. Griffin said US companies are grappling with how much to invest in technology and how much value they can extract from it. Shah wrote: "Capex itself has become a two-way risk. Cutting spending raises questions about the durability of the investment cycle... while further increasing spending raises questions about financing, execution and ultimately returns."