Two seasoned macro investors, sitting together, have arrived at a remarkably aligned conclusion: the current AI-driven upcycle is approaching its end, and the impending decline will not be a single-digit correction but a major bear market with losses of 30 to 50 percent.

In a recent in-depth interview featured on the blog of US asset manager DoubleLine Capital, "New Bond King" Jeffrey Gundlach and Swiss hedge fund manager and "stock market prophet" Felix Zulauf stated that the world is shifting from a unipolar to a multipolar order, with geopolitical conflicts and sanctions creating structural inflation. Against the backdrop of this crumbling old order, both the tech frenzy in US stocks and the seemingly bottomless US fiscal black hole have reached an extremely dangerous tipping point.

AI Frenzy in Final Stages, US Stocks Face 30-50% Plunge

"This is absolutely not a 20% pullback; it is a bear market driven by recession and valuation contraction, with declines ranging from 30% to 50%," Zulauf stated bluntly from the outset, predicting the US stock market will peak as early as the third quarter of this year or, at the latest, the first quarter of next year.

His reasoning chain is clear: the capital expenditure-to-revenue ratio for hyperscale cloud computing companies has surged from 10% to 30%, semiconductor memory chip prices have risen 200-300%, and free cash flow is turning negative—Oracle is already negative, and others will follow. "When these companies start raising funds from the market, when their free cash flow starts shrinking, the entire AI cycle begins to decelerate."

To time an exit precisely, one must closely watch the performance of semiconductor stocks—the "shovel sellers to the gold miners."

Gundlach fully agrees. Currently, the top ten AI-related stocks account for a staggering 41% weight in the S&P 500 index. This extreme concentration eerily matches the characteristics of major market tops in previous cycles.

"I advise people not to hold any momentum-driven or market-cap-weighted US stocks," Gundlach offered as a direct defensive strategy.

He also referenced his "famous miscalculation" on September 30, 1999—when he turned maximally bearish on the Nasdaq, only for the index to rally another roughly 80% in the fourth quarter. "But 18 months later, from that point, the Nasdaq went from 100 to about 20. So when fundamentals are deteriorating but stock prices are still rising, that's the most dangerous time. And we are there right now."

Recession Won't Bring Down Bond Yields; US-Style YCC and Treasury Restructuring Unavoidable

This is one of Gundlach's core judgments and his greatest point of divergence from traditional economic logic.

The usual logic is: economic recession → Fed cuts rates → long-term yields fall → bond prices rise. But Gundlach believes this time is different. Even if the US economy falls into recession by 2027, US long-term Treasury yields will not see a meaningful decline.

The reason is that fiscal problems have reached a structurally uncontrollable level: US interest expense has ballooned from about $300 billion seven years ago to nearly $1.4 trillion annually now. Meanwhile, the fiscal deficit is expanding by $2 trillion per year, about 6% of GDP.

"Once a recession hits, the deficit won't be 6% of GDP; it will be 10% or higher. That will trigger a buyers' strike," he said. "We've seen this in the developed world—even Japan's long-term rates are rising, which many thought would never happen."

Gundlach believes policymakers will then have two potential responses.

Option A: Yield Curve Control (YCC). Treasury Secretary Scott Bessent might choose to suppress long-term rates, as the US did post-World War II—inflation rises, but long-term rates are artificially kept low, resulting in sustained negative real rates and a subsequent 40-year bond bear market.

Option B: US Treasury Restructuring. Gundlach revealed that two years ago, he had already reduced the coupon rate on Treasuries with maturities over 10 years in his managed funds from 4.75% to 1.5% to hedge against restructuring risk. After he publicly discussed this idea in an interview last year, it was raised to White House National Economic Council Director Kevin Hassett, who responded it would "absolutely never happen."

Gundlach's reaction to that: "In the investment world, the synonym for 'Never' is 'Imminent.'"

Zulauf has a slight disagreement on long-term rates: he believes during a recession, the 10-year Treasury yield could still fall from a high of around 5.25% to about 3.75%—but this window would last only about 6 months, not 12. He adds that short-term rates would be kept very low by central banks.

Private Credit Crisis: "Feels Like 2006," "Everyone is Lying"

Compared to public markets, the hidden world of private credit raises even greater concern. It is rife with rating fabrication, liquidity illusions, and accounting games to conceal losses.

"This gives me a strong feeling, exactly like the one I had in 2005, 2006: everyone is lying, lying about credit quality, lying about software exposure—saying it's 15% when it's 28%—creating a completely illusory liquidity that is now shattered," Gundlach said.

Ratings are purchased. "These private rating agencies have maybe 30 employees but are rating hundreds of loans, each with 200-250 pages of documents. I don't think they are analyzing; I think they are selling price lists. Want a CCC rating, that's a buck. Want a single-B, that's ten bucks. And everyone ends up with BBB-."

Credit quality is severely overstated. One large private credit fund's marketing material claimed "investment-grade corporate bonds are the cornerstone of the portfolio." But in the private world, securities rated B+ or above constitute only about 2% of all securities. "Less than 2% is single-B+ or above. What cornerstone?"

Software asset risk is underreported. Some funds claim 15% software exposure, but it's actually 28%.

The liquidity illusion is broken. Many investors who bought interval funds through financial intermediaries believed they could fully redeem quarterly, but the fund-level redemption limit is actually only 5%.

Valuation marks are chaotic. Gundlach cited an example where the same loan held by eight different private firms was marked anywhere from 95 to 8. Another case: a $100 million PIK bond was still marked at par value 100, even though the underlying private equity had been written down 98% to $800,000.

Offshore reinsurance is the final black box. A complex web exists between private equity, private credit, and their captive insurance companies, with risks transferred to offshore reinsurers in Barbados, Cayman Islands, Bermuda—places with no regulation or transparency. "I'm not sure those risks are really hedged. Once a recession hits and fixed annuities and life insurance need to pay out, those assets are not adequately reserved for."

Zulauf added, "All the problems will surface when the market turns and the tide goes out."

AI Funding Chain and Private Credit Are Connected

AI and private credit may seem like separate markets—one in equities, one in credit. But in this framework, they are linked through the cost of capital.

Rising AI capital expenditures will pressure free cash flow. As free cash flow declines, companies must either issue equity or debt. When borrowing, if long-term rates don't fall, financing costs won't ease automatically as in past cycles.

Lower-rated companies face more trouble. In past downturns, spreads widened, but falling risk-free rates sometimes offset the pressure, allowing struggling firms to refinance. Now, if risk-free rates stay high or rise, the refinancing window narrows.

This transmits directly to bank loans, CCC loans, and private credit. Gundlach noted cracks are already appearing in these markets. The core issue isn't a sudden deterioration in one sector but the breakdown of the old model reliant on low rates and easy refinancing.

Therefore, the AI trade isn't just about watching NVIDIA Corp, cloud providers, or data center orders. It ultimately depends on whether funding markets can continue to provide capital and whether credit markets can withstand higher rates.

Dollar Weakness, US Stock Underperformance, "Second Inning" Just Starting

Gundlach highlighted a historical pattern: in the past 13 US stock market declines, the dollar rose in the first 12, by about 8-10%. But during the 2025 tariff turmoil, the dollar fell 8-10%.

"This confirms my view—the market's reaction function has changed in this rate hike cycle."

He believes the era of US stock market outperformance relative to global peers is over, with emerging markets now beating the S&P 500. "We are in the second inning, not the eighth, not the ninth."

Zulauf added a risk point: Asian sovereign funds have bought massive dollar assets over the past 12 months, but not Treasuries—AI stocks instead. "Once the market turns, they will sell stocks and sell dollars simultaneously. That's completely different from holding Treasuries and would accelerate dollar weakness."