Jeffrey Gundlach, CEO of DoubleLine Capital, has expressed significant concerns about the artificial intelligence investment theme, dramatically cutting his stock allocation recommendation from 40% to 30%. He is moving his money away from the "epicenter" of AI, advocating for investment in a single Fortune 500 equal-weighted index instead of cap-weighted funds. Gundlach specifically highlights the Invesco S&P 500 Equal Weight ETF (RSP) as his preferred stance, arguing it acts as a better hedge against potential AI credit issues. He has even reduced his personal portfolio's AI exposure to zero due to perceived excessive risk in the sector.
Gundlach's apprehension stems from what he sees as red flags in the corporate credit market for AI companies. He notes that bonds issued by AI firms are seeing their spreads "blow out" just days or weeks after issuance, which he interprets as a signal of credit stress that typically precedes problems in equity markets. This concern is amplified by the fact that technology stocks, heavily influenced by AI, constitute roughly 40% of the S&P 500 index, creating a concentration problem that cap-weighted funds cannot escape.
Beyond AI, Gundlach is critical of the Federal Reserve's monetary policy, suggesting they should have hiked rates by 50 basis points instead of 25, citing their own forecast that the 2% inflation goal won't be met until 2029. He observes that the 2-year Treasury yield, at 4.74%, is 100 basis points above the fed funds rate, indicating the market expects higher rates. Gundlach also points to a looming energy constraint, with world petroleum reserves at multi-decade lows and WTI crude at $107.02 per barrel, driving up costs for fertilizer, freight, and food, and hindering goods disinflation. This backdrop, combined with the U.S. national debt reaching $40.05 trillion, with annual interest payments around $1.1 trillion, leads him to believe the next 6 to 9 months will be a "difficult phase" for the economy, linking private credit and insurance companies as potential systemic risks.
He further warns of an impending fiscal crisis, noting that government borrowing costs are rising globally, with 10-year Treasuries breaching 5% and 30-year Treasuries yielding around 5.25%. This is driven by mounting fiscal deficits, persistent inflation, and the need for governments to compete with technology companies issuing massive amounts of debt for AI infrastructure. Gundlach views the S&P 500's Shiller cyclically adjusted price-to-earnings ratio at 42 as historically associated with negative 10-year real returns, reinforcing his cautious outlook.
