Are we heading towards a storm in the financial markets?

For once, in this article, I will rely solely on my own 40 years of professional experience in the financial markets and my own analysis of the current situation. I will try to be as simple and clear as possible.

Every financial crisis or stock market shock is unique in its unfolding and outcome, but many commonalities generally underlie their beginnings. For the most part, strategists, analysts, and investors struggle to identify, if not the peaks, then at least the signals indicating a downward shift in trends. The two main reasons why those who have succeeded are few are: 1) because stock markets are bullish in the long term, it is very difficult to maintain a negative position for long when one is wrong, and 2) time is precious, and making a mistake is even more costly when one has short positions and the market continues to rise.

As a reminder, the current situation has three important characteristics for the rest of the reasoning:

1. The Great Financial Crisis of 2008/2009

• This led states (and first and foremost the US under Obama) to boost their economies in order to prevent the financial crisis, which had already caused the economy to fall into recession, from turning into a depression.

• While inflation had already been under control for about ten years, the recession led to negative inflation, or deflation, with a fall in consumer prices.

• Central banks then quickly intervened by drastically lowering their intervention rates to revive the economy, and by buying hundreds of billions of dollars of debt and putting them on their balance sheets to prevent the failure of other financial institutions after the resounding collapse of the investment bank Lehman Brothers.

This is how the Western world, for the first time, experienced key interest rates (those set by the Central Bank) at 0, or even negative, for several years. The idea was that lending money to economic agents at no cost would stimulate the economy, which had the desired effect. However, this also inevitably led to excesses and an explosion of speculative, leveraged investments.

2. The Covid crisis is reviving inflation

Just as the situation was normalizing from 2015 onwards, and interest rates were slowly rising, the Covid crisis hit, reigniting inflation due to:

1. Energy price shocks in 2021 (followed by those resulting from the Russian invasion of Ukraine)

2. Global disruptions to supply chains in a global economy, creating price pressures

• Most European countries began major efforts during Covid to revive their economies, further inflating public debt (the case of France is well known, with opposition parties still accusing Macron today of being the cause of the explosion of our debt. Question: what would they have done if not the same thing…?)

• At that time, central banks reacted by raising interest rates rapidly and significantly.

3. Western sovereign and local government debts continue to balloon

• One of Trump's unfulfilled promises was to curb and then reduce the debt, which, on the contrary, due essentially to tax cuts (affecting mainly the wealthiest), accelerated to reach $40 trillion this summer.

• With a federal budget of $7 trillion, the government will spend between 15 and 20% on interest alone by 2026

• The geopolitical climate is such that the major historical financiers of American debt, namely the Japanese and the Chinese, have not only stopped financing new debt issued by the US, but are also selling the American government bonds they hold.

This factor is extremely important because the culture of the American private investor is entirely geared towards stocks. Therefore, they are not going to easily step in and help finance their country's debt.

• This in turn creates distrust of the dollar, reinforced by a return to favor of the Yen for the first time in decades.

Three factors are now contributing to accelerating the recovery of inflation, namely:

• The rise in fossil fuel prices, due to the closure of the Strait of Hormuz, as well as the neutralization of a large part of Russia's refining capacity by Ukrainian drone attacks. US and European strategic reserves have been significantly depleted for the past six months, and a continuation of these conflicts risks creating serious supply problems.

• The friction caused by threats and, in some cases, the imposition of tariffs by the Trump administration

Finally, there is the impact on the prices of certain minerals and metals of the explosive demand stemming from widespread electrification. For example, the price of copper is at its highest historical level, and nothing will be able to curb its rise in the long term. It takes 15 to 16 years to start up a new mine, given that demand is expected to increase by 50% by 2040. Supply will not keep pace with this growth, especially since copper mining is linked to serious pollution problems.

So where do we stand today?

1. Interest rates are rising

The current rise in interest rates increases the cost of credit, to levels that are bearable at this stage, but the trend remains upward due to the resurgence of inflation.

This, in turn, makes investing in stocks (as well as other assets such as real estate) less attractive. Historically, there has most often been an inverse correlation between rising interest rates and stock markets. The main reason for this is that higher borrowing costs usually lead to a future economic slowdown.

Another factor is the increase in what is known as the "risk premium" on stocks. This is the additional return an investor demands for placing their money in a risky asset (such as stocks) compared to a risk-free investment (such as government bonds). Put simply, a high 10-year rate offers an attractive "risk-free" return, so investors shift their money from stocks to bonds.

The chart above clearly illustrates what happens to the stock market (in yellow) between 2022 and December 2024, when interest rates (in blue) rise sharply and then more steadily. When rates then move within a band between 3.5% and 5%, the stock market recovers. Today, the market is fixated on a 5% US 10-year Treasury yield as the upper limit, beyond which stocks will truly begin to suffer. We are currently at 4.92%...

2. “Private Credit” is a cause for concern

A significant portion of the economy, particularly in the United States, has been financed for the past decade by what is known as "private credit"—private debt issued directly by companies and invested by institutional funds. Unlike listed corporate bonds, this debt is not analyzed and rated by debt rating agencies. Investors therefore conduct their own credit analysis. This riskier debt offers potentially higher returns for investors. The fact that these funds are invested in a multitude of corporate loans partially mitigates the risk of loss on some of them. When interest rates rise, the cost of these loans increases accordingly, which has already begun to cause bankruptcies among some issuing companies. The problem becomes real when investors want to exit these funds, forcing fund managers to try to sell off part of their distressed debt portfolios or prohibit withdrawals, potentially triggering panic. We're not there yet, but continued interest rate hikes could lead us there, with repercussions for all other risky assets.

3. The race for AI investments in the US: a colossal off-balance-sheet debt

In mid-August, a Wall Street Journal (WSJ) article captured market attention by highlighting that the combined off-balance-sheet commitments of nine tech giants (Microsoft, Google, Amazon, Meta, Oracle, Nvidia, Broadcom, AMD, and SpaceX) exceeded $3 trillion. The article's analysis suggests that capital expenditures (Capex), estimated at over $800 billion for 2026, represent only the tip of the iceberg. The four largest cloud service providers (CSPs) alone account for $2.4 trillion in future commitments—related to equipment purchases and leases not yet in effect—a sum that far surpasses their current on-balance-sheet lease and long-term debt. The WSJ argues that if assumptions about AI technology and demand prove wrong, these commitments could become a considerable burden for technology companies and their investors.

Since this article was published, it is estimated that $1.1 trillion has already been invested.

Where these investments can start to resemble a game of cards is when companies such as Open AI, Nvidia, Microsoft, Oracle, and AMD invest in each other through massive equity swaps, service agreements, and hardware partnerships — often without a single real dollar leaving the ecosystem.

This is where the main intrinsic fragility of the US stock market lies.

• The information technology sector and tech giants represent approximately 30% to 32% of the total value of the S&P 500, the main index of the US market.

• Artificial intelligence is certainly becoming increasingly present in the lives of businesses, government agencies, and individuals

• That said, the investments that major American technology companies are making in a race against each other and against time are, as the Wall Street Journal says, gigantic.

• However, these are long-term investments with business models that are poorly defined or not well defined at this stage, with no guarantees of return.

• Especially since these American companies have a habit (and intend to again) of targeting the global market. However, the Chinese are developing generative AI that is almost as effective at an estimated cost of around one-tenth that of the Americans, significantly increasing the latter's investment risk.

4. An uncertain outcome to the US midterm elections

Whatever one thinks of Trump and his administration, tax cuts and incentives for pension fund investments in stocks have been driving the stock market rally for the past 18 months. A Democratic victory, which many of us desire in the hope of seeing a normalization of US relations with the rest of the world, an easing of tensions, and a return of institutions that uphold the rule of law, would lead to a less favorable US stock market environment.

5. High valuation of the US stock market

All of this comes at a time when US stocks are expensive, although corporate earnings have so far justified it.

If we move beyond simple valuation criteria (high P/E ratios, but still below the levels of the dot-com bubble in the early 2000s), the situation becomes more complex. One of Sweden's most reputable investors, Christer Gardell, believes that the US market is based on 50% cash flow (or companies' ability to self-finance) and 50% air… Another major investor, Nicolai Tangen, head of the Norwegian sovereign wealth fund, believes that the AI bubble could collapse on the stock market, and the fund is currently drastically reducing its exposure to risky markets.

This creates an obvious weakness in the entire system, which relies, in order to hold together, on:

• A geopolitical easing, whether in the Middle East or Ukraine, in order to bring down energy prices and inflation, and therefore interest rates

• Continued growth in corporate earnings, partly dependent on lower raw material costs, lower interest rates, and therefore continued global growth

• Evidence of monetizing AI ROI

Many experts point out that the internet bubble of the late 90s burst not because long-term visions were wrong, but because of the realization of how long it would take to monetize these investments.

Many warning lights are now flashing red, and the valuation implies that the risk of a significant decline and loss of confidence in the medium term is far greater than the risk of a continued rise. It is often in this context that a "black swan" event occurs—an external factor that few, if any, foresee and that acts as a warning signal.

The timing is tricky, and US growth is still being driven dramatically by massive investments in AI. Some Cassandras, who saw the dot-com bubble bursting too early in the fall of 1999, missed the acceleration and the final phase of the market's rise. It all comes down to the degree of risk one is willing to take. I would be quite incapable of timing the market's highs, but personally, I can't afford to risk a downturn.

With the S&P 500 currently, on September 10th, at 2.5% below its all-time highs, I'm selling…