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

Four risks sit beneath the current market highs that investors are largely ignoring: an energy shock from the closed Strait of Hormuz, heavy AI spending with uncertain returns, growing stress in private credit, and the mechanical risk that passive flows can accelerate on the way down.

The sensible response is not to predict when trouble arrives. It is to keep meaningful stock exposure while adding ballast — gold, Treasuries, and cash — so the portfolio holds up whether the risks materialize or not.

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.

The bull case for stocks remains intact. The AI build-out, passive inflows, strong corporate earnings, and simple FOMO are all real forces pushing indices higher.

At the same time, several material risks are visible and underpriced. This piece examines four of them and outlines a practical way to position for them without needing to call the top.

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 is underpriced

The Strait of Hormuz has been effectively closed since early March. Roughly one-fifth of global oil supply normally moves through the strait, and shipping traffic has fallen more than 90%. The International Energy Agency has described this as the largest oil supply disruption in market history.

Oil prices have nevertheless drifted lower in recent weeks. Brent crude fell back toward $97 in late May after spiking near $138 in April. Traders appear to be betting that a deal will reopen the strait soon. As of late May, however, talks remain deadlocked, and fresh reports of strikes have emerged. The market is pricing in an optimistic outcome that has not yet occurred.

The buffer of oil already on the water when the conflict started has largely been delivered. Major Asian economies have drawn down reserves. The U.S. Energy Information Administration expects global inventories to decline sharply through the second quarter and has projected Brent prices near $106 for May and June. Iraq has declared force majeure on some exports, Gulf producers cut output during the disruption, the UAE exited OPEC effective May 1, and the IEA has released hundreds of millions of barrels from strategic reserves.

Oil is only the most visible part of the problem. The strait is also a critical route for liquefied natural gas and for the fertilizer and chemicals that support global food production. The UN trade body has warned that sustained higher energy and freight costs will feed directly into food prices and broader cost-of-living pressure. Even if the strait reopens tomorrow, the supply shortfalls already in motion could keep prices elevated and increase the risk of recession.

Markets are behaving as if the worst has already passed. That assumption remains untested.

Crack #2: AI spending has outrun visible returns

The scale of AI-related capital spending is enormous. Hyperscalers plan to spend roughly $725 billion on capex in 2026 alone, with total data-center investment across the industry approaching $1 trillion. Microsoft has guided to around $190 billion, Amazon near $200 billion, and Meta has raised its range to $125–145 billion. OpenAI’s Stargate project adds another $500 billion in planned infrastructure.

The returns on this spending remain unclear. AI hardware depreciates quickly — roughly 20% per year — which means the major companies now face an annual depreciation bill estimated at around $400 billion. In several cases, this exceeds current profits from AI-related activities. Free cash flow is under pressure, and a meaningful portion of the build-out is being funded with new debt.

This level of investment relative to the economy is approaching the peak seen during the dot-com era. Historical patterns show that periods of unusually heavy corporate investment have often preceded weaker stock returns. A Risk.net survey of market professionals ranked AI-related risks as the single largest investment concern for 2026, citing high capex, rapid obsolescence, and heavy resource consumption.

None of this means the technology itself is without value. It does mean that “transformative technology” and “profitable investment at current valuations” are two separate claims. If the financial returns disappoint, the impact will not be limited to the largest technology companies. It will extend to the entire ecosystem built around them.

Crack #3: Private credit is showing stress

Stress has appeared first in private credit, the roughly $1.8–2 trillion market of non-bank lending that grew rapidly over the past decade.

In March, Apollo capped redemptions on its $25 billion flagship private credit fund. It honored only about 5% of withdrawal requests, returning roughly 45 cents on the dollar to investors who asked for their money back. Other large funds faced similar pressure. Blackstone’s main credit fund received redemption requests near 8% in the first quarter and injected $400 million of its own capital to meet them. Its shares reached a 52-week low. BlackRock restricted withdrawals on a $26 billion fund after requests reached 9.3%. Ares capped its fund at 5% after requests exceeded 11%. Blue Owl sold $1.4 billion of loans to satisfy redemptions, and its stock fell more than 40% for the year.

Bank of America analysts expect redemption requests across the sector to peak in the second quarter of 2026, suggesting the pressure may continue.

The structural problem is a mismatch between assets and promises. These funds hold illiquid, multi-year loans but offered investors quarterly liquidity. That arrangement works until many investors ask for their money at the same time. Because private credit is highly leveraged and interconnected with banks, losses here can quickly affect other parts of the financial system.

Crack #4: Passive flows can accelerate on the way down

The same passive flows that support stock prices on the way up can amplify selling on the way down.

When investors sell index funds during a market decline, fund managers must sell the underlying stocks to meet redemptions. Those sales push prices lower, which triggers more selling. The process is mechanical and can move faster in reverse than it does on the way up.

This dynamic is especially dangerous because of current market concentration. A small group of mega-cap technology stocks now accounts for roughly a third or more of the S&P 500. A shock in that sector can affect the entire index quickly through passive vehicles.

Terry Smith of Fundsmith has warned that the steady shift into index funds is “laying the foundations of a major investment disaster.” Strategist Michael Green has made the point more directly: passive money simply adds more capital to assets that are already rising, which weakens the normal corrective forces in the market. A weaker labor market adds another layer of risk — fewer automatic 401(k) contributions mean less steady buying to support prices.

How to position for these risks

None of the risks described above are predictions of an imminent collapse. The bull case remains credible. The appropriate response is to maintain meaningful exposure to stocks while adding assets that behave differently when equities decline.

Three assets are particularly useful in this environment:

  • Gold. It has been the strongest major asset class over the past two years and trades above $5,000 per ounce. Central banks have been aggressive buyers. Gold tends to perform well during periods of geopolitical tension, persistent inflation, and currency weakness — all relevant risks today.

  • Medium-term U.S. Treasuries. With the 10-year yield near 4.1%, Treasuries currently offer income while also providing a buffer if the economy weakens. They have historically rallied during recessions.

  • Cash. A yield of roughly 4% on money-market funds is not exciting, but cash provides flexibility. It allows an investor to buy assets at lower prices if markets fall sharply.

Diversification is the only reliable way to protect a portfolio when both upside and downside scenarios are plausible. The goal is to remain positioned for growth while holding assets that can limit damage if one or more of the risks materialize.

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.

Stay locked in...

/Kimere

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

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