While Wall Street celebrates the AI-driven stock rally, two seasoned global macro investors are sounding a starkly different alarm. In a recent in-depth discussion, Jeffrey Gundlach, known as the New King of Bonds, and Swiss hedge fund manager Axel Zulauf reached a consensus: the AI-fueled US stock uptrend is entering its final phase. They warn that the market may face not just a routine correction, but a bear market with declines ranging from 30% to 50%. Both pointed out that resonating risks—including tech valuation bubbles, runaway fiscal deficits, and hidden dangers in the private credit market—could bring a storm faster than imagined.

Although they differ on some details, their outlook on the US capital market is highly aligned. Zulauf stated clearly that the upcoming adjustment will not be a mere 20% pullback but a true bear market, predicting the US stock peak could occur between the third quarter of this year and the first quarter of next year. In his view, the AI investment boom that drove tech stocks higher over the past two years is showing signs of fatigue. The capital expenditure-to-revenue ratio for major global cloud companies has surged from about 10% to 30%, and memory chip prices have doubled or tripled, yet corporate free cash flow is deteriorating rapidly. Several companies, including Oracle, have seen free cash flow turn negative. When these firms must support AI investments through equity issuance or debt, a cooldown becomes inevitable. The key indicator to judge whether the boom has peaked lies in observing whether semiconductor stocks providing hardware support for AI show sustained weakness.

Gundlach compares the current market environment to the eve of the dot-com bubble burst. The weighting of the top 10 AI-related stocks in the S&P 500 has reached 41%, an extreme concentration similar to multiple historical market bubble peaks. He advises investors to avoid holding US stocks reliant on momentum-driven or market-cap weighted logic. Recalling the 1999 internet bubble, he noted that after turning bearish, he witnessed the index continue to surge in the final quarter, followed by an 18-month plummet. The most dangerous moment for the market often lies in the phase where fundamentals deteriorate while stock prices still hit new highs; currently, we are in exactly this situation.

Compared to the tech stock bubble, the unsustainability of the US fiscal situation is more worrying. Data shows that annual US interest expenditure has surged from about $300 billion seven years ago to nearly $1.4 trillion, with the fiscal deficit expanding at a rate of about $2 trillion per year, accounting for approximately 6% of GDP. Once the economy falls into recession, the deficit ratio could exceed 10%, triggering a scenario where bond market investors refuse to buy Treasury bonds. Gundlach believes that even if a future economic recession occurs, long-term Treasury yields may not fall sharply as in the past; the traditional logic that recessions benefit bonds may fail. Facing an expanding debt burden, the US government may be forced to implement yield curve control in the future, diluting debt by tolerating higher inflation, or even facing the risk of debt restructuring.

Beyond the US stock and bond markets, the private credit market has also triggered high alert. Gundlach admitted that the current market environment reminds him of the eve of the 2008 financial crisis, with issues such as rating shopping, liquidity illusions, and serious asset valuation distortions existing in the industry. The valuation of the same loan asset on the books of different funds may vary hugely, with some assets that have been significantly written down still valued at face value. A large amount of risk is being hidden through offshore reinsurance institutions, forming a complex loop involving private equity, private credit, and insurance companies. Once the economy declines, these hidden risks will be exposed centrally.

The two investors particularly emphasized that AI and private credit, though seemingly independent, are closely linked through financing costs. As AI capital expenditure increases and corporate free cash flow deteriorates, more companies rely on capital market financing. If long-term interest rates cannot decline and financing costs remain high, it will not only affect tech enterprise expansion but also impact the high-yield bond and private credit markets. The root of the problem lies in the business model of the past, which relied on low interest rates and continuous refinancing, is losing support. In terms of global asset allocation, the era where US assets alone stood out may have ended. During most major US stock adjustments in the past, the US dollar rose concurrently, but recently during tariff turmoil, the dollar fell synchronously, showing a change in market logic. In the coming years, the excess returns of the US stock market relative to the global market will gradually disappear, and emerging markets are expected to become new beneficiaries. Zulauf warned that in the past year, Asian sovereign wealth funds have bought US dollar assets in a big way, but not US Treasury bonds; instead, they bought AI tech stocks. Once the market reverses, they will not only sell stocks but also sell US dollars simultaneously, which is completely different from holding US Treasury bonds in the past, and this behavior will further accelerate the US dollar's decline.