AI Doomsday Prophecies Spook Markets? Are We on the Eve of Another Financial Crisis?

TradingKey - When the 'first raindrops' of the AI bubble fell, no one expected it to trigger a storm that would sweep through global financial markets.

A widely circulated report from Citrini Research paints a picture of an AI-driven 'mass unemployment dystopia,' unsettling global capital markets—the massive bets investors previously placed on AI technology are now showing signs of wavering.

As the latest in a series of recent 'pessimistic' analyses exploring the disruptive effects of AI, it constructs a hypothetical scenario for 2028: the rapid iteration of AI technology will largely replace roles in software and delivery, triggering a wave of industry layoffs and eventually pushing the unemployment rate up to 10.2%.

This hypothetical AI-induced recession, once combined with a wave of defaults in mortgages and private equity loans, would directly hit the global financial system and could even trigger a crash in U.S. stocks and a freeze in credit markets, dragging down the overall economy. Clearly, this report has precisely struck a nerve regarding market participants' anxiety over the potential negative impacts of AI.

In fact, investor concerns are already reflected in capital market movements, as they continue to sell off stocks in software companies and industries easily replaceable by automation. Year-to-date, the U.S. software stock index has fallen by a cumulative 24%.

It is worth noting that the ongoing correction in the software industry could directly impact private credit products that rely on such assets; the associated risks cannot be ignored.

Business Development Companies (BDCs), while traded on public markets, are mostly managed by large private equity firms and operate similarly to private equity, with a core focus on current income and capital appreciation. The ongoing correction in the software industry could directly impact private credit products that rely on such assets; the associated risks cannot be ignored.

Barclays ( BCS) report data also corroborates this risk, showing that BDC industry exposure is highly concentrated in the software sector, at approximately 20%, making their asset quality highly vulnerable to recent declines in software stock prices and related credit valuations.

Private Credit Crisis Looming

The trillion-dollar global private credit market is facing its most severe challenge yet—recent consecutive reports of corporate bankruptcies, fraud allegations, and fund redemption freezes have stripped away the market's 'glamorous facade.' Private credit, which expanded frantically under low interest rates and loose liquidity following the 2008 financial crisis, is now exposing its fragile foundations.

Panic is currently spreading rapidly through the market.

Orlando Gemes, Chief Investment Officer at Fourier Asset Management, issued a stern warning: 'The red flags we are seeing in private credit today are strikingly similar to the situation leading up to the 2007 financial crisis.'

He specifically mentioned that the continuous weakening of lender protections, combined with complex liquidity terms, 'masks the mismatch between investors' perception of "readily liquid assets" and the actual "assets that can truly be exited."'

As a 'barometer' for the private credit market, the predicament of Business Development Companies (BDCs) continues to fester. Deutsche Bank ( DB) data shows that these listed institutions, which have high allocations to private credit and the software industry, are seeing their stock price discounts to Net Asset Value (NAV) climb to peaks not seen since the COVID-19 pandemic.

Meanwhile, BDCs under top asset managers like KKR ( KKR ), BlackRock ( BLK) and others that target individual investors are caught in a triple squeeze of plunging stock prices, high bad debts, and redemption runs.

Last week, Blue Owl Capital ( OWL) announced permanent redemption restrictions on its OBDC II fund, along with plans to liquidate assets in stages to return cash to investors quarterly—this means investors have completely lost the option for autonomous redemptions, and the previous rule allowing 5% fund cash withdrawals per quarter was directly canceled.

As early as September 2025, the bankruptcies of auto parts manufacturer First Brands and subprime lender Tricolor Holdings ignited market fears over risks from highly leveraged borrowers. More importantly, these two companies were backed by several well-known banks, including UBS ( UBS) O'Connor and Jefferies ( JEF) Financial Group, which had extended hundreds of millions of dollars in loans to them, leading the market to worry about risk transmission into the financial system.

Chain Reaction from Private Credit to the Financial System

JPMorgan Chase ( JPM) CEO Jamie Dimon once issued a warning on this: the corporate credit environment has been too loose over the past decade, and 'when you see one cockroach, there are probably many more in the shadows.' This warning was soon echoed in the capital markets, as investors began a frantic sell-off of assets related to high-risk borrowers.

Moody's data shows that large U.S. banks have extended approximately $300 billion in loans to private credit institutions, funding that has fueled the expansion of the private credit industry. During the Trump administration, private debt products further penetrated the brokerage and retirement accounts of millions of ordinary American investors, meaning the scope of risk transmission could far exceed expectations.

Even more alarming is the rapid expansion of non-bank financial intermediaries (NBFIs). Recent research from the New York Fed shows that NBFIs' share of global financial assets has exceeded 50%, and is as high as 60% in the U.S., with their influence on the financial system continuously amplifying.

This 'multi-layered nested' risk transmission chain requires particular attention. Although banks have reduced direct lending to the real economy since the financial crisis, they participate indirectly in subsequent credit allocation by issuing senior loans to NBFIs—which then lend the funds as junior credit to end-borrowers.

Once a problem occurs in the intermediate links, risks are likely to transmit backward along the chain to the banking system. Fed Vice Chair Bowman noted that banks issued 60% of mortgages before the financial crisis, whereas today that proportion has nearly halved, with many borrowers turning to non-bank lenders, making the structure of the financial system more complex.

Could Credit Risk Trigger a Hidden Threat to U.S. Stocks?

From the disruptive impact of the AI industry to the emergence of crises in the private credit market, a series of chain reactions could expose U.S. stocks and even the U.S. economy to black swan risks.

JPMorgan Chase CEO Jamie Dimon issued a warning about the U.S. economy at Monday's annual investor day—the current market environment of high asset prices and cutthroat competition in the banking industry reminded him of the situation before the 2008 financial crisis.

While many economists are optimistic about the Trump administration's tax cuts and deregulation policies, believing they will drive U.S. economic growth this year, Dimon remained exceptionally cautious. He admitted that he prefers to anticipate potential risks while market expectations are high.

'I personally think people are getting a little blindly optimistic—thinking that current high asset prices and massive trading volumes are the norm and that there won't be any problems in the future,' Dimon said at the meeting. 'The cycle will turn one day... I don't know what the trigger will be, but I'm very anxious about it. High asset prices don't make me feel safe; instead, I feel that risks are continuously accumulating.'

In his view, the succession of economic cycles is an inevitable trend. Once the cycle turns, a wave of borrower defaults will follow, affecting not just lenders but often spilling over into industries people least expect.

'There are always some unexpected situations in the credit cycle, and usually the most surprising industries end up being hit the hardest,' Dimon cited as an example. 'In 2008 and 2009, no one expected utilities and telecom companies to be affected, but this time, the rise of artificial intelligence could put the software industry on the front lines.'

Regarding the risks in the private credit market, Dimon expressed complete agreement with his deputies' judgments. Troy Rohrbaugh, Co-Head of Commercial & Investment Banking at JPMorgan, pointed out during the event that current credit issues will not be limited to the private credit sector but could 'spread to the broader market.'

He mentioned: 'For now, risks seem to be appearing only locally, but that situation could change at any time, and we are prepared for it.'

Dimon finally reiterated that the current market environment is strikingly similar to the three years preceding the 2008 financial crisis: 'Everyone is making a lot of money, leverage is high, and everyone thinks everything is possible, but risk is often hidden in this kind of blind optimism.'