Billionaire “Bond King” Jeffrey Gundlach says the AI frenzy fueling US stocks is being driven by powerful momentum forces that can flip sharply once stress appears.
In a new Fox Business interview, the DoubleLine Capital founder says the rise of passive investing has created a feedback loop in mega-cap equities, especially companies tied to artificial intelligence.
“Well, it is obviously a huge momentum investment. There is so much passive investment now. The passive assets and passive funds. crossed over the assets and active funds. And that just means that money pours in, and they are buying the market-cap-weighted indices, like the S&P 500. And so it is a virtuous circle.”
Gundlach warns that the reflexive market structure can only persist while confidence remains intact. He also says that fault lines are starting to show, like the emergence of credit default swaps (CDS) in names tied to AI.
“And it keeps going and keeps going until such time as cracks start to appear. I am not saying cracks are definitively here yet, but things are starting to happen, like I mentioned about the bifurcating of yields and CDS in the AI-related categories.”
A CDS acts as insurance against a company defaulting on its debt. When CDS prices rise, it indicates that investors think the company’s credit risk is getting worse. Gundlach appears to suggest that credit stress is emerging underneath AI mania and that the rally could be fragile.
Gundlach adds that the fundamentals are being overshadowed by flows, and if negative catalysts emerge, the reversal may be swift.
“So at some point, it’s going to reverse, and the virtuous circle will turn into a vicious cycle. Based on PEs today and the huge amount of non-transparency that’s going on in private credit and other things, I’m very cautious.”
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