Private Credit Fragility Weighs on Hard Assets Bet Ahead of 2026

Market strategist Larry McDonald has sounded the alarm on emerging credit stress as 2026 approaches, warning that hard assets are likely to benefit as investors react to growing financial vulnerabilities. Speaking in a recent interview with Kitco News, McDonald, a veteran of Lehman Brothers and founder of The Bear Traps Report, outlined a looming credit cycle shift that has already begun beneath the surface of robust equity markets. He emphasized that investors must not overlook the widening divergence between equity valuations and the signals coming from credit markets according to the report.

McDonald highlighted early signs of distress in traditionally stable segments like private credit and structured lending. One notable example is the sharp decline in pricing for First Brands' debtor-in-possession loan, which traded in the 30s despite having top-tier collateral. This, he argues, reflects a breakdown in underwriting standards and serves as a warning signal for broader market risks. Additionally, Coreweave bonds have seen yields rise close to 12%, signaling growing uncertainty around the sustainability of AI-driven infrastructure expansion.

He warned that many data center developers face negative free cash flow amid high capital expenditure expectations. While equity markets remain fixated on tech-led growth, credit markets are responding more realistically to tightening financial conditions and delayed infrastructure timelines. McDonald described the current environment as a mismatch between expectations and realities, which could fuel a larger correction if left unaddressed according to the analysis.

A Systemic Risk in Private Credit

A central concern for McDonald is the structure of private credit itself. He pointed to a $300 billion industry offering quarterly liquidity to investors despite backing illiquid assets. This setup creates a potentially systemic risk, especially if high-net-worth investors begin demanding redemptions en masse. In such a scenario, private credit managers may be forced to mark down assets sharply, triggering a feedback loop reminiscent of past credit crises as research shows.

This liquidity mismatch echoes the 2008 financial crisis, when short-term funding for long-term assets caused widespread defaults and market instability. McDonald warned that the current private credit model is similarly fragile, as redemptions could quickly spiral into a broader liquidity crunch. The lack of transparency and the mismatch between asset durations and investor expectations could amplify the impact of a downturn according to market experts.

Capital Rotation and the Case for Hard Assets

Looking ahead, McDonald anticipates a major capital rotation in 2026, particularly as the Nasdaq 100 swells to a $32 trillion market capitalization. He argued that even a small reallocation of capital could have a disproportionate impact on smaller, capital-starved sectors. Hard assets like energy, copper, coal, and infrastructure-linked equities are likely to be the beneficiaries, as investors seek tangible value amid growing uncertainty according to the analysis.

The strategist emphasized that these sectors remain underowned relative to their critical role in supporting power grids, data centers, and industrial expansion. As AI and digital infrastructure demand surge, the importance of underlying physical resources becomes more pronounced. McDonald also highlighted political and policy dynamics, including emerging geopolitical power shifts in Washington and continued fiscal and monetary easing, as reinforcing the case for real assets over long-duration growth equities according to the report.

Credit Stress and the Path Forward for Investors

Despite his warnings, McDonald acknowledged that a severe credit shock could temporarily drive correlations higher across markets. However, he believes such an event would likely prompt aggressive central bank intervention, ultimately reinforcing the long-term appeal of hard assets. For 2026, his message remains clear: while equity valuations may appear stable, credit markets are already delivering a different verdict according to market analysis.

Investors are advised to remain vigilant, especially as signals like double-digit bond yields and distressed loan prices become more common. McDonald's analysis underscores the need for a shift in portfolio strategies, emphasizing the importance of liquidity and the growing appeal of tangible assets in an era of financial uncertainty according to expert insights.