AI boom or doom

Posted 27 February 2026

Global stocks went more or less nowhere this week. The UK and Europe’s strong runs continued, US markets consolidated, and China returned from holidays to find increasing overseas demand for the Renminbi. President Trump’s State of the Union Address barely moved markets. After the Supreme Court’s tariff ruling, the Trump factor feels much less influential on markets than the AI theme. 

February was filled with polarising narratives but very little price movement at the index level. Stasis reflects investors’ deep uncertainty: does AI spell doom or boom? Are private credit problems another financial crisis or a storm in a teacup? 

Unlike a few months ago, there is no sense that markets are overexcited – as the tepid reaction to Nvidia’s stellar earnings showed. The AI bubble talk has disappeared and investor positioning may, if anything, have become biased towards the negative. 

Private credit crunch should lead to greater transparency
Private credit provider and fund manager Blue Owl halted redemptions in one of its retail-focussed funds this week due to a lack of liquidity, sparking fears of a private credit crisis and hitting private credit-equity firms’ shares hard. Fears were compounded when UBS put out a research note saying that “US high yield, leveraged loan and private credit defaults could rise to 3-6%, 8-10% and 14-15%, respectively”  if software companies fall to AI disruption. 

Toby Nangle, of the FT’s Alphaville, points out that UBS’ projection is a risk scenario rather than their base case – full blown recession with many more AI losers than winners. Still the probability has risen since November. His chart below (slightly amended) compares this risk scenario to history.

It also emphasises that Blue Owl has halted fund redemptions because of investor fears, not actual defaults. Indeed, actual defaults have fallen.

This is a classic case of investment providers marketing a product as liquid when it is not. Public market investors are understandably worried about contagion – considering the growth of private markets since the 2008 global financial crisis (GFC) – but we note that this has not affected yields on even the lowest-rated investment grade bonds in the public market. That is probably due to different underlying assets: private credit firms lent extensively to tech companies, which AI now threatens to displace. 

That should limit the spread into public markets. We do not want to underplay the risks that a run on private credit firms pose, but it is worth noting that the amount of leverage in the system is a fraction of what it was before the GFC. That is because private credit firms simply cannot create money in the same way banks can. 

For the private credit firms that weather the storm, there could be a positive outcome. The need to generate more liquidity means private markets will be forced to become a little less private, increasing transparency for their underlying assets. New technologies like the crypto currencies’ blockchain open ledger mechanisms – which many private credit providers already use – make greater transparency possible. 

The SaaS-pocalypse is a risk scenario, not a central scenario
The rush to redemptions in private credit funds was partially brought about by the so-called ‘SaaS-pocalype’ – the supposed wiping out of software-as-a-service firms by new AI tools. One relatively unknown research firm, Citrini, put out a thought-provoking piece this week that shook equity markets with its hypothetical picture of a 2028 world economy ravaged by rapid AI adoption. The central idea behind this scenario – and Citrini stresses it is just a scenario – is that the threat of AI causes the companies most at risk of replacement to invest in the technology replacing them, collapsing the knowledge economy and causing a deep recession. 

The fact that Citrini’s sci-fi dystopia had such a profound effect on markets, despite containing no new hard data or quantitative forecasts, is fascinating in itself. It shows the power of narratives to shape nervous investors’ actions. In tying together the  many themes that we discuss, Citrini make it clear how they might combine into a larger-than-expected downside. 

The competing narrative on AI – articulated nicely in a response from Citadel Research – says that the adoption of the new tools will be much slower than the ‘move fast and break things’ crowd suggest. That allows productivity gains to feed back into growth, wealth creation and new jobs. Importantly, none of the doomsday AI forecasts are playing out in the current economic data. Citadel point out that US job postings for software engineers are actually rising. Initial jobless claims in the US have barely moved either. 

Unfortunately, the current data cannot tell you whether the doomsday narrative is correct or not. AI layoffs, if they come, will not show up in the jobless claims for a while, as higher paid service workers tend not to claim immediately. The futurists say we are at an inflection point for AI. If that is right, the backward-looking data is immediately obsolete. 

The global economy keeps growing all the while
The aforementioned fall in actual credit default rates is a consequence of robust global growth. US growth is running at 2.1%, according to the Chicago Fed, while JP Morgan’s nowcast puts UK growth at 2% annualised for this quarter. 

Meanwhile, equity price-to-earnings valuations look much less stretched. Nvidia’s share price declined – despite stellar earnings results – as analysts downgraded their growth forecasts. That means the world’s biggest company is trading at less of a premium (in price-to-earnings terms) to other US stocks than before. 

Earlier in the week, there was even some relief for tech companies that were previously under pressure. Investor positioning has become overly negative for these shares, so even mild relief can see markets squeeze up. 

Japan’s markets look particularly strong. International investors have fully bought into the Japanese growth story – the only question now being whether that growth will be too strong and lead to inflation. We expect inflation to stay as contained – as January’s 2% reading suggests – but the very debate shows that Japan’s lost decades are over. 

Across the world, it is the consumer-focussed economy that will ultimately decide where growth goes, and that is holding up well. Underneath all the market predictions, the global economy keeps growing. Investors should not lose sight of that.