Gundlach, the "new Bond King," says the US stock market is "superficially prosperous but internally rotten," like a hollow tree about to break.

"Bond King" Jeffrey Gundlach issued a stern warning about the U.S. stock market, saying that beneath its seemingly calm surface, it is quietly decaying, like a large tree that looks intact but is hollow inside and could break at any moment.

On Thursday, Gundlach, in an interview with David Rosenberg, founder of Rosenberg Research, stated that although the S&P 500 index is still hovering near historical highs, the market has become severely divergent—many individual stocks have quietly entered a correction phase, and market breadth continues to deteriorate. He also expressed deep concern about the hidden risks in the private equity market, the uncontrolled expansion of the US fiscal deficit, and the structural shift in the dollar's status.

This warning comes as yields on 10-year and 30-year U.S. Treasury bonds have risen to their highest levels since 2002, with increasing pressure on the bond market, while the stock market has not experienced a sharp decline as it has in the past, a divergence that is unsettling some investors.

Hollow Tree: The Superficial Prosperity and Internal Corruption of the S&P 500

Gundlach used his own experience as an analogy to express his core judgment on the US stock market. He told the story of a century-old silver maple tree in his Buffalo, New York home—a tree that seemed to be in good condition a year ago, but was discovered to be completely hollow inside and "on the verge of complete collapse" after a huge branch suddenly broke off and nearly hit the chimney.

"I suddenly realized that this is exactly the state of the market we are in today," said Gundlach, CEO and chief investment officer of DoubleLine Capital.

Data confirms his assessment. According to MarketWatch, 80% of the S&P 500 companies have seen their share prices fall at least 10% from their 52-week highs, indicating a technical correction; among them, 39% have fallen by more than 20%, entering bear market territory. However, due to the strong performance of a few large-cap stocks, the overall index remains at a high level, masking the widespread weakness within the index.

"There's a lot of rot inside the S&P 500, but it's not obvious. You have to wait until the branches fall off to find that the market is hollow, just like that tree," Gundlach said.

Private Equity Market: Hidden Losses in Circular Investments

Gundlach extends his warning to the private equity market, arguing that it harbors similar systemic risks to the stock market. He describes an increasingly prevalent circular investment structure: private equity firms acquire private credit divisions, then acquire insurance companies, which in turn purchase loans issued by the affiliated private credit divisions.

He pointed out that private equity and credit firms consistently assure investors that everything is normal, and quarterly reports often fail to reveal problems. However, he cited a specific example: an asset held by a private credit fund was valued at 100 at the end of last year, but by the first quarter of this year, it had fallen to between 77 and 78, meaning that the value of the underlying portfolio had shrunk by about 23%. Since such funds hold thousands of diversified loans, this decline reveals a considerable amount of hidden losses.

"I think all these factors are building up a growing awareness that things aren't all right," Gundlach said.

Fiscal deficit and bond market pressure: both paths lead to inflation.

At the macro level, Gundlach is deeply concerned about the rapidly expanding US fiscal deficit. He believes the US government currently faces two undesirable choices: either start printing money or restructure the debt—that is, require bondholders to accept longer maturities or lower coupon rates. He emphasizes that both paths will ultimately drive up inflation.

At the same time, bond yields are being pushed up by a combination of factors: the war in Iran has led to rising energy prices, global bond issuance has reached an "alarming scale," and the demand from artificial intelligence companies for financing infrastructure construction is also amplifying the pressure on bond supply.

Gundlach warned that the continued expansion of debt issuance will keep pushing up government interest payments, which may eventually force authorities to respond by printing money or intervening in long-term interest rates, putting downward pressure on the dollar.

The US dollar has lost its safe-haven appeal: old patterns have broken down.

Gundlach also pointed out that the dollar's traditional safe-haven status during market turmoil is crumbling, a structural signal that deserves close attention.

He reviewed more than ten corrections in the S&P 500 since 2000, with the dollar index rising by 8% to 10% each time. However, during the correction in April 2025, the dollar experienced a rare decline—the first divergence in history.

"This is because people realize that we have entered a different system, so in the next recession, the dollar will not rise, but fall," Gundlach said. The investor, famous for accurately predicting the 2007 U.S. housing market crash, believes this shift signifies that the market is reassessing the long-term creditworthiness of dollar assets.

Risk Warning and DisclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.