Jeffrey Gundlach, known as the Bond King, has issued a stern warning about the US stock market, saying it is quietly decaying beneath a calm surface, like a large tree that looks intact outside but is hollow within and could snap at any moment.

In an interview with David Rosenberg, founder of Rosenberg Research, on Thursday, Gundlach said that although the S&P 500 remains near record highs, serious divergences have emerged inside the market, with a large number of individual stocks quietly falling into correction and market breadth continuing to deteriorate. He also expressed deep concern about hidden risks in private markets, the uncontrolled expansion of the US fiscal deficit, and a structural shift in the dollar鈥檚 status.

The warning comes as US 10-year and 30-year Treasury yields have risen to their highest levels since 2002, keeping pressure on the bond market, while stocks have not fallen as sharply as they did in similar past situations. That divergence has made some investors uneasy.

The hollow tree: surface prosperity and internal decay in the S&P 500

Gundlach used a personal story to explain his core view of US stocks. He described a century-old silver maple at his home in Buffalo, New York. A year ago, the tree still looked reasonably healthy, but only after a huge branch suddenly broke and nearly hit the chimney was it discovered that the inside had completely rotted away, leaving it on the verge of total collapse.

It suddenly occurred to me that this is exactly the state of the market we are in today, said Gundlach, chief executive officer and chief investment officer of DoubleLine Capital.

The data supports his judgment. According to MarketWatch calculations, 80% of S&P 500 constituents have fallen at least 10% from their 52-week highs, meaning they are already in a technical correction, and 39% have dropped more than 20%, entering bear market territory. Yet because of the strength of a small number of mega-cap stocks, the index as a whole remains near highs, masking broad weakness underneath.

There is a lot of rot inside the S&P 500, but that rot is not obvious. You have to wait until the branch falls to discover that the market has become hollow, just like that tree, Gundlach said.

Private markets: circular investing hides unrecognized losses

Gundlach extended his warning to private markets, arguing that they contain systemic hidden dangers similar to those in the stock market. He described an increasingly common circular investment structure: private equity firms buy private credit units, then buy insurance companies, and those insurers in turn buy loans originated by affiliated private credit firms.

He noted that private equity and credit firms keep assuring investors that everything is fine, and quarterly reports often do not reveal problems. But he cited one specific case: assets held by a private credit fund were marked at 100 at the end of last year and had fallen to between 77 and 78 by the first quarter of this year, implying that the value of the underlying portfolio had shrunk by about 23%. Because such funds hold thousands of diversified loans, that decline points to sizable unrecognized losses.

I think all of these factors are building a growing awareness that things are not all right, Gundlach said.

Fiscal deficits and bond market pressure: both paths lead to inflation

At the macro level, Gundlach is deeply worried about the rapid expansion of the US fiscal deficit. He believes the US government now faces two less-than-ideal choices: either turn on the printing press or restructure its debt, meaning asking Treasury holders to accept longer maturities or lower coupons. He stressed that both paths will ultimately push inflation higher.

At the same time, bond yields are being pushed up by a combination of factors: the Iran conflict has driven energy prices higher, global bond issuance has reached an astonishing scale, and demand from artificial intelligence companies to finance infrastructure buildouts continues to amplify pressure on bond supply.

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

The dollar loses its safe-haven halo: old rules no longer hold

Gundlach also pointed out that the dollar鈥檚 traditional safe-haven role during market turmoil is breaking down, a structural signal that deserves close attention.

He reviewed more than a dozen S&P 500 pullbacks since 2000, noting that the dollar index rose 8% to 10% each time. But in the April 2025 adjustment, the dollar posted a rare decline, the first such divergence in history.

That is because people realize we have entered a different regime, so in the next recession, the dollar will not rise, it will fall, Gundlach said. The investor, who gained fame for accurately predicting the US housing market crash in 2007, believes this shift means the market is reassessing the long-term credit foundation of dollar assets.