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The stock market has been volatile this year as investors weigh up various threats. And thereâs one that might be getting less attention than it deserves.
Itâs been impossible to miss the emergence of artificial intelligence (AI). But thereâs another dimension beyond OpenAI, software, and data centres.
Private credit
One of the areas that has been seeing pressure recently is private credit. In recent years, private equity firms have bought a lot of software companies.Â
A lot of this has been done using loans â from private credit companies. Thereâs nothing wrong with this, but those loans are starting to mature.Â
The trouble is, interest rates are higher than they were five years ago so refinancing is more expensive. And thereâs another issue.
Software stocks have been under pressure. So the assets bought with those loans might not be worth enough to cover the outstanding debt.
Thatâs not a good situation. And while it sounds like an isolated issue, it might have major implications for the stock market as a whole.
Implications
Uncertainty in the private credit market is leading to higher redemptions. In some cases, funds have had to limit withdrawals.
That, however, only increases the sense that thereâs a problem. And the effects reach much further than just private equity.
One issue is that institutions like insurance companies often own private credit firms. So a wave of defaults might create issues for annuities.
Another concern is the potential for tighter lending standards. The trouble with this is that less credit availability could well lead to a recession.
In that situation, the stock market in general might well be vulnerable. And this is something Iâm not sure ordinary investors are paying attention to.
Risks
This is one of the reasons I tend to stay away from stocks like Legal & General (LSE:LGEN). Investing is hard enough without making things worse.
The FTSE 100 company has been growing its annuity book recently. But a lot of this has been invested in private credit funds in the US.
In 2025, the firm signed a deal to invest in private credit with Blackstone. So thereâs definitely a risk thatâs very hard for investors to assess accurately.
Legal & General does have big solvency reserves to cover losses. And a dividend yield above 8% means investors get some compensation for the risks.
Ultimately, though, I think investors should tread very carefully here. When the risk is hard to evaluate, there are usually better opportunities elsewhere.
The good news
Figuring out what to make of private credit right now is very difficult. But the good news for investors is that they donât need to.
The only things investors really need to focus on are the stocks they own. And they need to be able to assess those businesses carefully.
That includes being prepared for a recession. But it doesnât mean having a deep insight into the chances of one being imminent.
The outlook for lending conditions is a key part of the outlook for some companies. Investors, however, donât have to invest in those.
I think there are enough opportunities elsewhere at the moment. And these are where Iâm continuing to focus my investing.
The post Is the stock market about to reach breaking point? appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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