OpinionMay 28, 2026

Four Cracks That Could End This Bull Market — and How to Hedge Them

The bull case is real — but so is the downside. Four risks the market is underpricing (energy, AI, private credit, passive flows) and a simple framework to hedge them.

By the TradeRoom Live Editorial TeamReviewed May 28, 2026
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Four Cracks That Could End This Bull Market — and How to Hedge Them

Key takeaways

A market that only prices in good outcomes is a fragile one. Beneath the record highs sit four risks the market is largely looking past: an energy shock that isn't fully priced in (the Strait of Hormuz is still shut), an AI build-out that has spent ~$1 trillion while the payoff remains unproven, visible stress in private credit, and a passive-investing flywheel that runs in reverse faster than it runs forward. The intelligent response isn't to predict the top — it's to diversify, pairing stock exposure with ballast like gold, Treasuries, and cash so you're fine whichever way it breaks.

In the companion to this piece, we laid out why the major indices keep printing record highs despite a war, an oil shock, and reaccelerating inflation: the AI spending boom, the picks-and-shovels trade, the passive-investing flywheel, FOMO, TINA, and genuinely strong corporate earnings.

Every word of that is true. But a market that only prices in good outcomes is a fragile one. The same forces lifting stocks can reverse, and several large risks are sitting in plain sight while the market chooses to look past them. Here are the four that should be on your radar.

Four cracks beneath the record highs Risks the market is currently underpricing RECORD HIGHS #1 Energy shock Hormuz still shut; oil's dip bets on a deal that isn't done #2 AI payoff gap ~$1T spent, with depreciation set to exceed profits #3 Private credit funds gating exits (Apollo paid ~45% of redemptions) #4 Passive reverse outflows sell faster than inflows ever bought
None of these is a prediction of doom — they are the underpriced risks a prepared investor positions for in advance.

Crack #1: The energy shock isn't fully priced in

This is the most immediate threat, and it's hiding behind a comforting narrative.

The Strait of Hormuz has been effectively closed since early March, after the U.S.–Israel conflict with Iran erupted on February 28. Roughly a fifth of the world's oil moves through that waterway, and shipping traffic through it has collapsed by more than 90%. The International Energy Agency has called it the largest oil supply disruption in the history of the market.

Yet oil has actually been drifting lower lately — Brent slipped back toward $97 in late May after spiking to roughly $138 in early April — because traders are betting on a deal that reopens the strait. The problem: as of late May, U.S.–Iran talks remain deadlocked over Tehran's insistence on controlling the strait and preserving its nuclear program, and there have been fresh reports of U.S. strikes. The market is pricing the optimistic scenario into an unresolved crisis.

Here's the part that hasn't hit home yet. The oil already on the water when the conflict began has now been delivered — that "floating supply" buffer is largely exhausted. Major manufacturing economies in Asia have been drawing down reserves. The U.S. Energy Information Administration expects global oil inventories to fall sharply through the second quarter and sees Brent holding around $106 in May and June. Iraq has declared force majeure, Gulf producers slashed output at the peak of the disruption, the UAE left OPEC effective May 1, and the IEA has tapped hundreds of millions of barrels from strategic reserves.

And oil is only the headline. Hormuz is also a critical artery for liquefied natural gas, and for the fertilizer and chemical inputs that feed the global food supply. The UN's trade body (UNCTAD) has warned that higher energy, freight, and fertilizer costs flow straight into food prices and cost-of-living pressure. Even if the strait reopened tomorrow, the shortages already in the pipeline could push prices higher, snarl supply chains, and tip the economy toward recession. Markets seem to be assuming the all-clear has already sounded. It hasn't.

Crack #2: The AI bubble has spent $1 trillion and is still waiting on the payoff

The AI build-out is the market's great engine — and potentially its great vulnerability.

The spending is real and enormous: close to $1 trillion in data-center capex in 2026 alone. The returns are the open question. AI hardware depreciates fast — on the order of 20% a year — which means the hyperscalers are now staring at an annual depreciation bill estimated at around $400 billion, more than their combined profits. Free cash flow is shrinking across the group, with Amazon's projected to turn negative this year, and the build-out is increasingly debt-financed: the big platforms raised over $100 billion in debt in 2025 to fund it, with some estimates putting the total funding need in the trillions.

For perspective, U.S. investment in tech equipment and software reached about 4.4% of GDP in 2025 — nearly the peak set during the dot-com bubble. The asset manager GMO has noted an uncomfortable historical pattern: heavy corporate investment tends to precede lower stock returns and, often, recessions. Investor Michael Burry has gone further, calling AI a bubble he considers "too big to save." A Risk.net poll of market professionals ranked AI the single biggest investment risk for 2026, citing heavy capex, obsolescence, and runaway resource use.

None of this means AI is fake — it's a genuine, durable technology. But "transformative technology" and "profitable investment for shareholders at these prices" are two very different claims. If the payoff disappoints, the damage won't stop at the Magnificent 7; it would ripple straight through the picks-and-shovels names built around them.

Crack #3: Private credit is already showing stress

While everyone watches stocks, the cracks have arrived first in private credit — the roughly $1.8–2 trillion universe of non-bank lending that ballooned over the past decade.

The signal event came in March, when Apollo capped redemptions on its flagship $25 billion private-credit fund, honoring only about 5% of withdrawal requests — meaning investors who asked for their money got back roughly 45 cents on the dollar. It wasn't alone. Blackstone's big credit fund saw first-quarter redemption requests near 8% and reportedly injected $400 million of its own capital to shore up liquidity; its shares hit a 52-week low. BlackRock limited withdrawals on a $26 billion lending fund after requests hit 9.3%. Ares capped its fund at 5% after requests topped 11%. Blue Owl sold $1.4 billion of loans to meet redemptions and its stock fell more than 40% on the year. Bank of America analysts expect these redemption requests to peak in the second quarter of 2026 — meaning the pressure may not be over.

The core problem is what critics call the "liquidity illusion": these funds hold illiquid, multi-year loans but promised investors quarterly exits. That mismatch is fine until everyone heads for the door at once. And the danger doesn't stay contained. Leverage and contagion mean losses in private credit can trigger runs on mid-sized banks, which then hit the funds and investors holding those bank stocks — the kind of chain reaction that turns a contained problem into a systemic one.

Crack #4: The passive flywheel works in reverse, too

Remember the self-reinforcing loop that drives index funds higher? It runs backward just as efficiently — only faster and more violently.

A market drawdown prompts investors to sell their index funds. To meet those sales, fund managers must sell the underlying stocks. That selling drags the indices down, which spooks more investors into redeeming, which forces more selling. On the way up, passive flows lift the market gently and steadily; on the way down, they can pull it lower with startling speed.

This is why the concentration we celebrated in the bull case is so dangerous in reverse. With a handful of mega-cap tech names making up roughly a third or more of the S&P 500, the index is acutely exposed to a single-sector shock. Terry Smith of Fundsmith warned in early 2026 that the relentless shift into index funds is "laying the foundations of a major investment disaster," even if he can't say when it ends. Strategist Michael Green makes the mechanical point bluntly: passive money simply "adds more money to things that go up," which blunts the normal forces that would otherwise pull overpriced stocks back to earth. There's even an economic feedback loop — a weakening job market means fewer paycheck-driven 401(k) contributions, which means less automatic buying to hold the whole thing up.

What an investor can actually do: hedge, don't predict

None of this is a call to sell everything and hide. Timing a top is a fool's errand, and the bull case is real. The intelligent response to a market where the upside and the downside are both genuine is the same one that's worked for a century: diversify, so you don't need to be right about which scenario plays out.

Hedge, don't predict Pair stock exposure with assets that zig when stocks zag GROWTH BALLAST / HEDGES STOCKS keep meaningful exposure — the engine of returns + GOLD — the everything hedge geopolitics, inflation, >$5,000/oz TREASURIES — paid to wait ~4.1% yield; rally if a recession arrives CASH — dry powder optionality to buy when others fire-sale
Diversify so you don't need to predict which scenario plays out — keep the growth engine, but bolt on assets that hold up when stocks wobble.

That means keeping meaningful exposure to stocks — but pairing it with assets that behave differently when equities wobble:

  • Gold — the everything hedge. Bullion has been the best-performing major asset class of the past two years, nearly doubling the S&P 500's return, and it's trading above $5,000 an ounce in record territory. It's the classic hedge against geopolitical chaos, inflation, and currency debasement — exactly today's risk set — and central banks have been buying it aggressively.
  • Medium-term U.S. Treasuries. With the 10-year yield around 4.10%, Treasury notes pay you to wait, and they typically rally hard if a recession actually arrives, cushioning a stock drawdown.
  • Cash. A 4%-ish money-market yield isn't exciting, but cash is optionality. When everyone else is dumping assets at fire-sale prices, the investor with dry powder gets to go shopping.

FOMO and TINA are not your friends — they're the emotions that talk you out of insurance right before you need it. Diversification is the friend. The goal isn't to predict the catastrophe; it's to be positioned so that you're fine whether it comes or not.

Stay locked in...

/Kimere

This article is market commentary for educational purposes and is not investment advice. It does not account for your individual circumstances, and it is not a recommendation to buy or sell any security or asset. Markets carry risk, including the loss of principal. Do your own research and consider consulting a licensed financial professional before making investment decisions.

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