AI is boosting the stock market. But it's a threat to private credit

Defaults in the highly opaque corner of finance known as private credit are expected to increase after hitting record highs in April, and some money managers are warning that retail investors may not be insulated from the fallout. The combination of ascendant artificial intelligence models, rising inflation and higher interest rates is weighing on the corporate loans that private credit uses as collateral for its funds. That has led some investors to try and pull their money back, never mind the sector's constrained liquidity. Credit analysts are warning that risks are going to intensify through the rest of this year as pressure mounts on the software sector, which supports a large share of the securitized loans favored by private credit. Software accounts for 19% of assets for private credit collateralized loan obligations, also called middle-market CLOs, according to S & P. "Our updated perspective points to a meaningful increase in private credit defaults, rising from roughly 4.4% to 9–10%, driven in part by the implications of the AI cycle," strategist Matthew Mish at UBS wrote Thursday. "Risk is expected to evolve over the next year," he added, "intensifying toward year-end and into early/mid-2027 as software businesses experience slowing growth, waning pricing power, margin compression, and contract cancellations," Mish wrote. …