Bernstein: AI Stock Selloff Could Lower Credit Costs for Small Businesses

Richard Bernstein, head of macro analysis at Janus Henderson, believes that the sell-off in AI sector stocks may reduce borrowing costs for small companies. The Fed is tightening policy, he claims, and speculative stocks are taking the first hit.

A major chip ETF closed last Thursday nearly 14% below its October high—many investors took this as a warning. However, Bernstein told CNBC that the sell-off also healthily re-evaluates capital.

According to him, capital was flowing into the AI data center industry on easy terms while other companies were experiencing shortages. If valuations adjust to the rest of the market, borrowing will become cheaper for the entire economy. He pointed to small companies: they have been rising for the past few sessions amid falling long-term rates, but as noted by the CNBC host, they are still down for the week.

He also referred to credit default swap (CDS) spreads—an indicator of default risk—as a sign of doubts about profits. Meanwhile, chipmaker stocks have been falling for eight consecutive sessions—a 16-year record—fueling the debate over whether the AI bubble is bursting.

Many investors are expecting one more rate hike, but Bernstein rejects this. The Fed raised the rate by a quarter point on September 16—the first time since 2023. He pointed to hot consumer, producer, and import price data as evidence of a real inflation problem. The core cost of imports is rising faster than core consumer inflation—a reversal of the trend of the past 30 years.

"The US is now importing inflation," Bernstein told CNBC.

Consumer staples are performing slightly better, which he interprets as fear of recession penetrating the market. Economist Peter Schiff, on the other hand, argues that most American stocks are in a bear market; according to Goldman Sachs, the median S&P 500 stock is 16% below its peak.

Bernstein acknowledges that the broader market may not help data centers or techs. But he expects the long-term story to be outside the leadership of the past two to three years.