"Short Seller" Doomsday Prophecy: AI "At Its Limit" U.S. Stocks Likely to Peak by Q3

Author: Long Yue, Wall Street Insights

Two seasoned macro investors sit together and arrive at an almost highly consistent judgment: this AI-driven upward cycle is nearing its end, and the next drop will not be a single-digit percentage, but a 30 to 50% major bear market.

On June 22, the latest in-depth interview was released on the American asset management company DoubleLine Capital's blog, where "New Bond King" Jeffrey Gundlach and Swiss hedge fund manager and "Stock Market Prophet" Felix Zulauf discussed the shift from unipolar to multipolar world, with geopolitical conflicts and sanctions leading to structural inflation. Against the backdrop of the disintegration of the old order, whether it’s the tech frenzy in U.S. stocks or the bottomless U.S. fiscal black hole, both have reached extremely dangerous critical points.

From left to right are Felix Zulauf, host Grant Williams, Jeffrey Gundlach

AI frenzy is coming to an end, U.S. stocks will face a 30% to 50% plunge

"This is definitely not a 20% pullback, but a bear market based on recession and valuation contraction, with declines between 30% and 50%." Zulauf straightforwardly states his clear judgment, predicting that U.S. stocks will peak as early as the third quarter of this year, and no later than the first quarter of next year.

His logical chain is very clear: large-scale cloud computing companies (super scalers) have increased their capital expenditure as a percentage of revenue from 10% to 30%, semiconductor memory chip prices have risen by 200%-300%, free cash flow has started turning negative—Oracle is already negative, and the next will follow. "When these companies start to seek market financing, and their free cash flow begins to shrink, the entire AI cycle will start to slow down."

To accurately escape the top, one must closely monitor the stock movements of those "selling shovels to gold miners" in semiconductors.

Gundlach fully agrees. Currently, the top ten AI concept stocks in the S&P 500 account for 41% of the index weight. This extremely concentrated figure astonishingly matches the historical market peaks of major market cycles.

"I advise people not to hold any momentum-driven or market-cap-weighted U.S. stocks." Gundlach offers a direct risk-avoidance strategy.

He also mentioned his famous mistake on September 30, 1999—when he turned extremely bearish on Nasdaq, which then continued to rise by about 80% in the fourth quarter. "But 18 months later, from that point, Nasdaq fell from 100 to around 20. So when fundamentals worsen but stock prices keep rising, that’s the most dangerous moment. We are exactly there now."

Recession is coming, U.S. bond yields will not fall, and the "U.S. bond restructuring" and YCC are unavoidable

This is one of Gundlach’s core judgments and the biggest divergence from traditional economic logic.

The usual logic is: recession → Fed cuts interest rates → long-term yields decline → bond prices rise. But Gundlach believes this time is different. Even if the U.S. economy enters recession in 2027, long-term U.S. Treasury yields will not see a meaningful decline.

The reason is that fiscal issues have already reached a structurally out-of-control level: U.S. interest expenses have soared from about $300 billion seven years ago to nearly $1.4 trillion per year now. Meanwhile, the fiscal deficit is expanding at a rate of $2 trillion annually, accounting for about 6% of GDP.

"Once a recession hits, the deficit will not be 6% of GDP but 10% or even higher. This will trigger a bond buyer strike." He said, "We’ve already seen this in developed countries— even Japan’s long-term interest rates are rising, which many thought would never happen."

Gundlach believes there will be two policy options at that time:

Option A: Yield Curve Control (YCC). Treasury Secretary Bessent might choose to suppress long-term interest rates, similar to what the U.S. did after World War II—rising inflation but artificially keeping long-term rates low, resulting in sustained negative real interest rates and a bond bear market lasting 40 years.

Option B: U.S. debt restructuring. Gundlach revealed that two years ago, he had already reduced the coupon rate of U.S. bonds over 10 years from 4.75% to 1.5% in his managed funds to hedge against restructuring risks. When he publicly discussed this idea in an interview last year, he was asked by the media about it by Kevin Hassett, director of the White House National Economic Council, who said "it’s absolutely impossible."

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

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

Private credit crisis: "It feels just like 2006," "Everyone is lying"

Compared to the public markets, the hidden private credit (Private Credit) market has triggered even stronger concerns. It is filled with rating fraud, liquidity illusions, and accounting tricks to hide losses.

Gundlach said:

"This gives me a strong feeling, exactly like in 2005 and 2006: everyone is lying, lying about credit quality, lying about software exposure—saying 15%, but actually 28%—creating a completely illusory liquidity, and that illusion has now been shattered."

Ratings are bought. "These private rating agencies have only about 30 employees but rate hundreds of loans, each with 200-250 pages of documentation. I don’t think they are really analyzing; I think they are just selling price sheets. Want a CCC rating? Pay $1. Want a single B? Pay $10. In the end, everyone gets a BBB-."

Credit quality is severely overstated. A large private credit fund claimed in promotional materials that "investment-grade corporate bonds are the backbone of the portfolio," but in reality, securities rated B+ and above account for only 2% of all securities in the private market. "Less than 2% are B+ and above—what do you use as the backbone?"

Software asset risks are understated. Some funds claim software exposure is 15%, but the actual figure is 28%.

Liquidity illusions have shattered. Many investors who buy interval funds through financial intermediaries believe they can redeem fully every quarter, but in reality, the redemption limit at the fund level is only 5%.

Valuation markups are chaotic. Gundlach gave an example: the same loan held by eight different private firms, with prices ranging from 95 to 8—same asset, some mark it at 95, others at 8. Another case: a $100 million principal PIK bond, which has been written down by 98% to $80,000 in underlying private equity, but the bond itself is still marked at face value of 100.

Offshore reinsurance is the last black box. Private equity, private credit, and the insurance companies they control form a closed loop, with risks transferred to offshore reinsurance companies in Barbados, Cayman Islands, Bermuda, etc., with no regulation and no transparency. "I’m not sure those risks are truly hedged. Once a recession hits, fixed annuities and life insurance need to be paid out, but those assets have no sufficient reserves."

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

AI funding chain and private credit are actually on the same line

AI and private credit seem like two markets—one on the equity side, one on the credit side. But within this framework, they are connected through funding costs.

AI capital expenditure continues to rise, which will suppress free cash flow. As free cash flow declines, companies will either issue equity or borrow. When borrowing, if long-term interest rates cannot decline, financing costs will not ease as they did in past cycles.

Lower-rated companies face more trouble. In past economic downturns, spreads widened but risk-free rates fell, sometimes offsetting some pressure and allowing distressed companies to refinance and survive. Now, if risk-free rates do not fall but rise, refinancing windows will narrow.

This directly transmits to bank loans, CCC-rated loans, and private credit. Gundlach mentioned that cracks are already appearing in these markets. The core reason is not a sudden industry collapse but the reliance on low interest rates and refinancing modes that are no longer smooth.

Therefore, AI trading is not just about Nvidia, cloud providers, or data center orders. Ultimately, it depends on whether the financing markets can continue to provide funds and whether the credit markets can withstand higher interest rates.

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