Jamie Dimon warns rising oil prices could trigger a recession and a bear market in 2026

By Tomi Kilgore

JPMorgan's CEO says the Iran conflict, as well as AI, could boost inflation in the short run, which could be the 'skunk at the party' this year

Jamie Dimon warns of a "skunk" that could be coming to the party in 2026 in the form of rising inflation that leads to a selloff in the stock market.

JPMorgan Chase CEO Jamie Dimon, the man who warned about cockroaches in the regional-banking system, sees a potential "skunk at the party" in 2026 that could lead to a recession and a bear market for stocks.

And while some might assume the skunk has something to do with worries about private credit, as Dimon wrote in the bank's (JPM) annual shareholder letter Monday, the lack of transparency has created greater losses than there should be in the current environment, he said. And because that market is relatively small, it "probably does not present systemic risk."

Also read: Jamie Dimon warns, 'When you see one cockroach, there are probably more,' after Tricolor loan loss.

He expressed concerns about the impact of the Iran conflict - as well as Russia's war in Ukraine - on energy prices, particularly in the short term. As an example, he noted that the "very large" recessions of 1974 and 1982 were believed to have been triggered by the rapid rise in oil prices.

He also said that while artificial intelligence should lower inflation in the long run, all the spending to build it out will likely increase prices in the short run.

For Dimon, it's inflation that's the wild card in the current environment. If inflation remains elevated, interest rates will rise, which he said was like "gravity" to almost all asset prices.

"The skunk at the party - and it could happen in 2026 - would be inflation slowly going up, as opposed to slowly going down," Dimon wrote. "This alone could cause interest rates to rise and asset prices to drop."

The economy is less fragile than in the past, but there is still a "tipping point" that causes a recession, he said. And because human nature "has not changed," he said, when asset prices fall, investor sentiment can change rapidly and cause a flight to cash.

JPMorgan's stock rose 0.8% in recent morning trading. It has lost 8.8% so far in 202, but has run up 39.8% over the past 12 months. In comparison, the S&P 500 index SPX has slipped 3.7% this year and advanced 30% over the past 12 months.

So for now, Dimon said the "most important outcome" for investors is the proper resolution to current wars. Other "tailwinds" for the economy and markets include the money to the economy by the One Big Beautiful Bill. Dimon also discussed extensively other issues, including AI, banking regulations and even the migration of the bank's employees from New York City to Texas.

AI is not a speculative bubble

Dimon likened the AI transformation to electricity and the internet, but said the pace of adoption will be much faster. While those others took decades, he believes AI implementation will accelerate over the next few years.

"We will deploy AI, as we deploy all technology, to do a better job for our customers (and employees)," Dimon wrote.

Although he could not say how the AI build-out will unfold, and he could not predict who will come out on top, he said he is sure it will have a "huge positive impact on productivity," believing it will cure some cancers and eventually reduce the workweek.

"Overall, the investment in AI is not a speculative bubble; rather, it will deliver significant benefits," Dimon wrote. "However, at this time, we cannot predict the ultimate winners and losers in AI- related industries."

Regulations aren't all bad or good

Dimon highlighted some issues with the current regulatory environment for banks. Risks to the financial system have been reduced since the financial crisis of 2008-09, and some rules have hampered lending and growth as they were created quickly and while regulators were in emergency mode.

He said he was glad to see that there is a proposal to revise regulations governing global systemic important banks (GSIB), which includes reducing requirements to hold capital in reserve, but he believes there are still some regulatory aspects that are "frankly nonsensical."

"While we can accept that some level of surcharge is appropriate, given our position in the market, the proposed level just seems to punish our success, our strength, our consistency and our balanced business model," Dimon said.

Private credit is relatively small

Dimon wrote that the leverage private credit market totals $1.8 billion, which compares with the U.S. high-yield bond market at $1.5 trillion and the syndicated leveraged loan market at $1.7 trillion.

But that compares with the total market size of investment-grade bonds of $13 trillion, and the total market value of residential mortgage securities and loans of $13 trillion.

"In the great scheme of things, private credit probably does not present a systemic risk," Dimon wrote.

One thing he said was surprising about the private markets is that, with the stock market near record highs - the S&P 500 is about 5.5% below its Jan. 27 record close - more companies have not taken advantage to go public.

"Private equity investments are now held for an average of seven years - this is virtually double what it used to be," Dimon wrote.

Don't miss: Elon Musk's SpaceX could lead a wave of jumbo IPOs after reportedly making this key move.

-Tomi Kilgore

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-06-26 1003ET