Published February 27, 2026
There has been a significant sales pitch over the past year or so to give smaller investors more access to the wonders of private equity and private debt. These opaque markets have exploded in recent years as an alternative to bank lending. Now, asset managers want to expand the market further for these assets by getting them into individual 401k plans. The huge potential of that new business has sent shares of the asset managers skyward in recent years.
However, just as the deregulation finger is on the trigger, the problems inherent in the private debt asset class are rising to the surface. Blue Owl Capital, a leading private equity/debt issuer and manager, recently made a dramatic change in their redemption policy, which may limit investor’s ability to exit their investment and get their money back.
Within the portfolios, the issue appears to center around the changing perception of software companies. For years, startup software companies have raised capital via private equity and debt markets. The subscription-as-a-service (SaaS) model is ubiquitous among software companies. For example, it is used by every TV streaming service, which are essentially software platforms delivering content.
As the AI lovefest has turned this year into an AI scare-fest for software companies, the smaller companies have found it suddenly very difficult to raise more funding as well as gain customers. Now that high-level AI models are available, it is extremely unclear what tasks and roles might be replaced. A couple of high-profile papers projecting that these smarter AI models could even replace some software platforms wholesale has sent investors running for the sidelines until things become clearer.
We have shown in recent weeks the massive selloff in software shares which migrated to trucking and wealth management companies, any business that depends heavily on software to deliver its value proposition. This selloff in software-driven businesses has, in turn, sent investors fleeing the debt of these companies. As these companies had become a notable component of the bank loan world, those loan books started getting written down in value.
Thus, we get the following drop in a bank loan ETF amid rumors of as much as a 10% default rate (more than twice what is typical for high-yield debt).
This is much like the housing bubble bursting, albeit on a much smaller scale. We would also note that the “match” lighting this fire is highly speculative at this point. These research papers and rumored capabilities are still in their infancy, if they’ve even been proven out at all. Nonetheless, a perception of heightened risk has entered these markets and knocked down asset prices.
How bad would this situation get? Here are two views from large money managers quoted in a recent Marketwatch article on the topic:
“Our read is that, to have a real credit crisis, you probably need a recession,” said Jimmy Chang, chief investment officer for Rockefeller Global Family Office, adding that defaults tend to be higher in a recessionary environment.
Still, AI bubble and disruption fears in the U.S. stock market have collided with private credit, according to Anthony Saglimbene, chief market strategist at Ameriprise Financial. “There’s less visibility,” and so less understanding, of the deals done in private credit and private equity, he said in an interview.
“I think you’re starting to see investors become so concerned that redemptions for some of these strategies” have started to pick up, Saglimbene said. But, he added, private credit doesn’t seem like a “systemic problem.”
However, it could well be a market problem of greater magnitude. After writing the above, we find Friday’s Marketwatch note from Bank of America’s Michael Hartnett amplifying the bank loan concerns here:
Time will tell how big of a deal this is. Right now, stocks are fairly stagnant as the AI “Big Spenders” – e.g. Mag 7 are languishing while the hard asset and defensive areas of the market hold everything together. But those areas are too small a piece of the pie and have become very expensive very quickly. Further, this month, money has poured into bonds despite the Fed being basically in a holding pattern. Those are all worrying signs.
But markets love to climb a wall of worry. Which way will the market break next we don’t know. We look to our models to keep us on the right side whichever way it goes.
Market Update
Tech investors looked this week to earnings from AI leader Nvidia to provide a boost to the struggling Mag 7 stocks. The group represents about a third of the overall U.S. stock market. After powering the stock market higher the past two years, the group has run out of gas this year leaving the broad market averages largely churning sideways for months. Before getting to Nvidia earnings though stocks had to deal with the fallout from the Supreme Court tariff ruling. The justices ruled the Trump Administration’s tariffs to be outside the scope of the President opening the door to a wave of tariff refund requests. While the stock market reacted positively to the Court’s decision last Friday, President Trump’s announcement of a new tariff regime hit stocks hard Monday. The broad market averages slumped -1%. But as investors further analyzed the impact, the downdraft was almost entirely reversed Tuesday. Badly beaten-down software stocks got a bid while a massive chip deal between AMD and Meta further encouraged tech investors. The S&P 500 recouped +0.8% Tuesday. The updraft continued Wednesday with another +1% rally ahead of Nvidia’s earnings. Software stocks also continued their rebound. But the rebound ran into a wall Thursday. Nvidia’s earnings beat all estimates. But investors shrugged and sent the stock down -5%. The weakness in the Nasdaq’s bell-weather AI stock pushed the market down -1% to continue the months-long market chop. Stocks fell further Friday with weakness in financial stocks joining the already struggling tech sector. A report on producer price inflation came in hotter than expected Friday. But interest rates still continued their month-long decline. Rates have plunged in February despite the Federal Reserve’s neutral stance as investors have ramped up the safety trade. The short-term five-year Treasury note fell to yield 3.5%, its lowest level in 18 months. As noted in our article this week, there is a notable de-risking occurring in bank loans, a consequence of the AI-induced software selloff. Thus far in 2026, bank loans have experienced their worst selling since the 2022 market slide. For stocks, the month of February closed with the S&P 500 down for the first time since last April’s tariff tantrum. But the down month was an almost negligible -0.86% as “late cycle” materials, energy, and defensive sectors all posted gains.
Stocks continued their churning behavior this week with good days followed by bad to leave indexes little changed. The S&P 500 finished the week down only -0.50%. The Nasdaq 100 (QQQ) stocks dipped -0.25%. Despite the negative feel to the market this week in the wake of Nvidia’s earnings response, the QQQ remains above the $600 level. After beginning the year with a big positive move, small cap stocks have joined the other indexes in their flat trading. This week, small caps slid -1.21%. In contrast to U.S. markets, international stocks registered their 14th consecutive winning week.
Warm wishes and until next week.