There's another AI-doom post doing the rounds. This time, the S&P 500 dives nearly 40%.

By Jamie Chisholm

A booming AI economy may be very bad for the broader economy, according to Citrini Research

AI adoption could see the stock market fall sharply from a record high in 2026

What if artificial intelligence actually meets or exceeds the hype around it, but that turns out to be very bearish for stocks? That's the scenario posed by a new piece of commentary doing the rounds over the weekend, which has caused quite a flutter online.

The piece, co-authored by Citrini Research and guest Alap Shah, managing partner at Lotus Technology Management, is written as a lookback from June 2028, when the unemployment rate has just risen to 10.2% and the S&P 500 is down 38% from its Oct. 2026 highs around 8,000.

The first step on this dystopian journey will be familiar to us in 2026: the dislocation caused by agentic AI. Software-as-a -service companies will lose sales as client demand falls. "The company that sold workflow automation was being disrupted by better workflow automation, and its response was to cut headcount and use the savings to fund the very technology disrupting it," projects the report.

By early 2027, AI usage will become the default among consumers and businesses. AI agents will be on smartphones, and they won't wait to be asked, working with the users preferences to deliver a continuous optimization process. This removes friction in consumption, stripping out inertia in subscriptions, constantly finding the cheapest and best option, reducing companies margins and thus profits.

For example: "Habitual app loyalty, the entire basis of the [delivery] business model, simply didn't exist for a machine," says Citrini. Andy Fang, founder of DoorDash, addressed this issue in a post on X Monday, saying: "The ground is shifting underneath our feet, and the industry is going to need to adapt to it."

This disruption will extend to payments, done over stabelcoins instead of a provider like Mastercard (MA).

This is all sector risk. But then the argument morphs into systemic risk as AI proves different to previous technological advances. "AI is now a general intelligence that improves at the very tasks humans would redeploy to. Displaced coders cannot simply move to 'AI management' because AI is already capable of that," says the Citrini report.

White collar job hiring will begin to collapse, they say. In their scenario, the bond market will notice this - white-collar workers represented 50% of employment and drove roughly 75% of discretionary consumer spending - and yields will start to fall.

In a normal recession, the cause eventually self-corrects. But this downturn's cause will not be cyclical. As companies lay off workers, they'll use the savings to buy more AI, and therefore cut even more workers. With fewer workers, there'll be less consumption. It is a feedback loop with no natural brake, they add.

And so the AI economy will continue to improve while the broader economy deteriorates. India's services exports will be particularly vulnerable to the agentic revolution, Citrini suggests.

In this scenario, things get bad in February 2027 - initial jobless claims spike to 487,000, the S&P 500 drops over 6%, and by the second quarter of 2027 there's a recession.

And then "the daisy chain of correlated bets" will start to fracture. Private credit companies will have to sharply mark down their software investments. Moody's will downgrade billions of dollars those debts in April 2027. Software backed loans start defaulting in the third quarter of 2027. Insurers with links to private credit are forced by regulators to raise capital or sell assets.

Citrini goes into great detail about these linkages, which are worth reading here. For example, they see house prices in San Francisco tumbling 11%. The government will be ideologically hamstrung in its response, reluctant to levy taxes on the AI economy to support displaced workers. "While the politicians bicker, the social fabric is fraying faster than the legislative process can move," says Citrini.

Citrini is at pains to point out at the start of their note that this scenario is not a prediction. "This isn't bear porn or AI doomer fan-fiction. The sole intent of this piece is modeling a scenario that's been relatively underexplored," they say.

The piece generated a wave of reaction. One founder, John Loeber, penned his own essay in opposition, arguing that as AI challenges white-collar labor, governments will fund large-scale physical re-industrialization.

The markets

U.S. stock-indices SPX DJIA COMP are lower at the opening bell on Wall Street as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is lower, while oil prices (CL.1) rise and gold futures (GC00) are trading around $5,174 an ounce.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              6909.51    1.07%  -0.09%  0.93%   14.91% 
   Nasdaq Composite                                                     22,886.07  1.51%  -2.62%  -1.53%  17.22% 
   10-year Treasury                                                     4.084      3.20   -13.30  -8.80   -32.60 
   Gold                                                                 5175.9     2.21%  3.42%   19.48%  74.34% 
   Oil                                                                  66.05      5.16%  8.58%   15.05%  -6.85% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

Novo Nordisk shares (DK:NOVO.B) (NVO) were under pressure as the Danish pharmaceutical company said a head-to-head study found a drug in development didn't cut as much weight as an Eli Lilly (LLY) product.

Honeywell International (HON) received a 26% discount on its deal to acquire a business tied to the struggling chemicals industry.

Gilead Sciences (GILD) to acquire biotechnology company Arcellx (ACLX) at implied equity value of $7.8 billion.

Merck (MRK) is creating a separate cancer business.

Domino's Pizza shares (DPZ) are jumping after the restaurant operator reported 4.9% global retail sales growth in the fourth quarter.

Keysight Technologies (KEYS) is among those companies reporting after the close.

JPMorgan (JPM) will hold a 'Company Update' in New York, starting at 4:30 p.m. Eastern

Fed governor Christopher Waller said that if the next jobs report points to a stronger labor market it may be appropriate to pause rate cuts.

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The chart

Jim Bianco of Bianco Research uses one chart to explain why everyone is screaming about chaos even with the S&P 500 just 0.99% below its record high. The blue line in the chart shows the market cap weighted average volatility of the S&P 500 constituents, while the orange line is the VIX itself VIX. The green line shows the spread between the two is at its widest on record (going back to 2014). "Individual stock volatility is exploding vs. the index," says Bianco.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   TSM     Taiwan Semiconductor Manufacturing 
   GME     GameStop 
   AMZN    Amazon.com 
   NVO     Novo Nordisk 
   INFY    Infosys 
   MSFT    Microsoft 
   AAPL    Apple 
   MU      Micron Technology 

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Beyond the newsroom

MarketWatch Picks: I'm 30 with $1M in my FXAIX account - I want to retire at 67. Is this strategy OK? How rich will I be at 67?

-Jamie Chisholm

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02-23-26 0936ET