I’ve been watching the markets for years, and every now and then, a quiet unease starts building in the back of my mind. Right now, as we close out 2025, that feeling is stronger than it’s been in a long time. The headlines keep talking about resilience and soft landings, but dig a little deeper and the cracks are impossible to ignore.
Consumers are stretched thin, valuations feel detached from reality, and liquidity is slowly draining away. In my view, heading into 2026, we’re walking into a period where several risks could converge at once. It’s not about predicting a crash tomorrow—it’s about recognizing vulnerabilities that could amplify any shock.
Let me walk you through the five risks that keep me up at night.
Key Risks on the Horizon for 2026
These aren’t abstract theories. They’re grounded in data we’ve already started seeing, from rising delinquencies to shifting corporate priorities. Perhaps the most frustrating part is how straightforward some of them seem—yet they’re still widely dismissed.
The Overextended Consumer
Let’s start with the foundation of the economy: everyday spending. For years, we’ve been told the consumer is strong, resilient, unstoppable. But look closer, and the picture changes dramatically.
Auto loan delinquencies in the subprime segment have climbed above levels not seen in decades. More than one in every sixteen borrowers is now seriously behind on their car payments. Credit card debt has topped a staggering trillion dollars, and late payments are stubbornly higher than before the pandemic, especially among younger and lower-income households.
Then there’s the rise of buy-now-pay-later services. What started as a convenient option has quietly become another layer of debt for millions. Many users are juggling multiple plans, missing payments, and effectively rolling over short-term loans just to keep up with basics. It’s not dramatic like 2008, but it’s insidious.
In my experience, this kind of slow bleed rarely ends with a bang. Instead, it shows up gradually: banks tighten lending standards, charge-offs rise, earnings warnings start appearing in retail and financial sectors. Companies that depend heavily on discretionary spending feel it first.
The problem is timing. Savings built up during the pandemic are largely gone for most households. Prices remain elevated, wages aren’t keeping pace for everyone, and any relief from lower rates will take time to filter through—if it comes deep enough at all.
- Rising defaults across auto, credit card, and personal loans
- Buy-now-pay-later turning into hidden subprime exposure
- Excess savings depleted, leaving little buffer
- Tighter credit conditions feeding into slower spending
It’s a cycle that reinforces itself. And once it gains momentum, it’s hard to stop quickly.
Sky-High Valuations and the AI Reality Check
Valuations today feel like they’re living in a different universe from economic fundamentals. The market is pricing in flawless execution and endless growth, particularly around artificial intelligence.
We’ve seen Shiller price-to-earnings ratios push past 40—territory historically associated with major peaks. Yet the narrative insists this time is different because of AI’s transformative potential. I’ve found that “this time is different” rarely ages well.
The cracks are already appearing in infrastructure financing. Massive data center projects that were announced with fanfare are being delayed or renegotiated as lenders and investors reassess risk and return. Building the physical backbone—power, cooling, chips, real estate—is enormously capital-intensive, and the payoff timeline remains uncertain.
The excitement around AI is real, but translating that into sustainable profits requires discipline, realistic timelines, and actual demand at scale.
Corporate leaders are starting to acknowledge this privately. Capital expenditure plans are being phased more cautiously. The marginal dollar is harder to justify when real interest rates remain positive and liquidity isn’t as abundant as it once was.
Multiple compression doesn’t always need a recession to begin. It can start simply when the cost of capital rises relative to expected returns. And right now, many growth stories are priced for perfection.
Liquidity Drying Up Slowly
One of the quietest but most important shifts has been the gradual tightening of financial conditions. Central banks have moved away from emergency accommodation, and the system is adjusting.
Positive real interest rates act like a slow drain on excess liquidity. Risk assets no longer get the same tailwind they enjoyed when money was essentially free. The marginal buyer has to think harder about opportunity cost.
We’ve seen this play out in pockets already: volatility spikes more easily, correlations break down during stress periods, and certain carry trades unwind abruptly. It’s not panic—it’s normalization with teeth.
What worries me is how dependent parts of the market have become on continuous liquidity support. When that support recedes, even gradually, pricing gaps can appear quickly.
- Real rates remain positive, reducing risk appetite
- Balance sheet constraints limit new buying
- Reverse repo facilities draining faster than expected
- Potential for sudden stops in credit creation
The transition from abundance to scarcity rarely feels smooth in real time.
Hidden Stress in Financial Institutions
Banks and lenders aren’t immune to the consumer slowdown. Regional institutions, in particular, have exposure to commercial real estate, consumer loans, and local economies that could weaken simultaneously.
We’ve already seen deposit costs rise and net interest margins compress for many. Add rising loan losses, and the pressure compounds. Some institutions may need to conserve capital rather than deploy it.
Specialty finance companies focused on subprime segments face similar challenges. When defaults trend higher across multiple products, provisions eat into earnings fast.
The danger isn’t necessarily widespread failures—regulators have tools to manage that. It’s more about reduced lending capacity rippling through the economy at exactly the wrong moment.
The Wild Card: External Shocks
Finally, there’s always the risk we can’t fully anticipate. Geopolitical tensions, policy surprises, or unexpected economic data can act as catalysts.
We’ve lived through a period of relative calm on some fronts, but history suggests calm rarely lasts forever. Energy markets, trade relationships, currency moves—any of these could introduce volatility at a time when buffers are thinner.
The most dangerous scenario isn’t any single risk materializing in isolation. It’s several converging while positioning remains extended and sentiment complacent.
None of this means markets can’t grind higher or that opportunities won’t exist. They always do. But ignoring building pressures rarely ends well.
In my view, 2026 could be a year where selectivity matters more than ever. Favoring quality, reasonable valuations, and genuine cash flow generation over narrative momentum feels prudent.
The risks are there if you’re willing to look. The question is whether the market will keep ignoring them—or finally start pricing them in.
Either way, staying aware and positioned accordingly seems like the smart move right now.
