The Australian – How the AI boom and a liquidity crisis are threatening to upend markets
However, as the tide of cheap liquidity recedes, we’re seeing a typical correction as investors retreat from riskier assets.
Investors must now navigate a treacherous confluence of shifting narratives just as global liquidity is structurally changing. The dangers are building.
This article was first published in The Australian on 26 February 2026.
For bulls and optimists, artificial intelligence (AI) is seen as a productivity booster that will usher in a period not unlike the Roaring 1920s. But that narrative is rapidly morphing into an existential threat, and the stockmarket is beginning to price in the possibility that AI becomes a monster that turns on its creators.
Anyone who has watched any of the short movies created in the last two weeks with just two or three prompts must wonder what happens to the thousands of VFX experts that typically dominate old-school movie credits. (See my blog: Data Centre Apocalypse).
They’re the first victims, followed by the white-collar workers in information technology, where payroll employment has remained flat since the release of ChatGPT in late 2022 and where companies such as Spotify have disclosed that their senior engineers haven’t written a single line of code since last year.
Indeed, AI industry leaders are fuelling these fears.
Microsoft’s head of AI, Mustafa Suleyman, predicts that white-collar work will be fully automated within 12-18 months.
If high-earning professionals are forced into lower-paying roles or into unemployment, the resulting hit to consumer spending could trigger a broader economic malaise. Maybe that explains Louis Vuitton’s 30 per cent share price crash, Kering’s 60 per cent fall, and Estée Lauder’s 70 per cent plunge.
While Citrini Research’s “2028 Global Intelligence Crisis” report was a fictional thought experiment positing that the success of AI would lead to an economic paradox, including spiralling unemployment, it immediately weighed on investor sentiment, with disruption manifesting in crumbling valuations for software and financial services players.
AI tools and plugins are undermining traditional Software as a Service (SaaS) models, leading to dramatic bifurcations in the market. While traditional energy and materials sectors have surged, software firms and financial data providers such as S&P Global, Thomson Reuters and FactSet have also seen their shares plunge as investors question whether AI can simply replicate their core services.
Even industry giants aren’t immune; IBM’s market value fell US$30 billion ($42.5 billion) in a single session this week amid reports that Anthropic had developed an agent capable of challenging IBM’s legacy COBOL software.
Counterintuitively, the AI disrupters are also seeing their values questioned. For the past two years, Silicon Valley has operated under a bigger-is-better philosophy, assuming more intelligence requires more power and more Graphic Processing Units (GPUs).
This “brute-forcing” of AI has fuelled a multibillion-dollar rush to build massive data centres. Now, fears of a “data centre apocalypse” are gaining sympathisers.
The threat stems from a fundamental shift towards architectural efficiency, mainly driven by Chinese innovators. Chinese lab DeepSeek is reportedly preparing to launch Version 4, a coding-first AI that uses the Engram Architecture to distinguish between static knowledge and dynamic reasoning.
By significantly reducing the required “compute”, such advancements could make current hardware-intensive approaches – and the valuations of the companies behind them – obsolete. As Michael Burry has warned, the push to develop power-hungry data centres may soon encounter a setback if software becomes exponentially more efficient.
Furthermore, with 50 per cent of the world’s top AI researchers now Chinese and 70 per cent of AI patents originating there, the hardware “moat” traditionally held by Western tech giants appears to be shrinking.
Compounding this technological disruption is a structural liquidity vacuum. According to Michael Howell of CrossBorder Capital, global liquidity has peaked and is entering a major cyclical downswing. And as global Gross Domestic Product (GDP) growth accelerates, it demands more cash for working capital, drawing liquidity away from asset markets.
And then there’s the US$45 trillion in maturing debt, which Howell initially said would affect markets this year but has now been pushed out to 2030. As Covid-era debt comes due for refinancing, capital is being drawn into servicing old debt rather than generating new value. This creates a liquidity vacuum that is especially harmful for risk assets such as bitcoin and the S&P 500.
This liquidity squeeze is already being felt in the unwinding of private equity (PE) valuation uplifts. For a decade, PE managers enjoyed selling their private company investments for almost 30 per cent more than their carrying values. Today, that cushion has evaporated completely.
The gap between what managers say their companies are worth and what the market will pay is cracking, forcing investors to recognise losses. If those investors want cash but don’t want to crystallise a loss in their PE holdings, what else will they sell that is liquid? Yep, stocks.
I think 2026 will demand a tactical pivot from you. We’re already seeing capital move from over-extended tech giants towards alternatives, including gold, the “Impressive-493” (the S&P 500 minus the Magnificent Seven), small caps, the booming private credit sector, and others.
While the immediate outlook for risk assets might seem bleak, there’s no need to panic. The inevitable “Fed Put” remains – policymakers won’t let the financial sector fail and will eventually be compelled to flood the market with liquidity again. Between 2027 and 2032, a once-in-a-generation buying opportunity could arise. Until then, the message is clear: diversify.
This article was first published in The Australian on 26 February 2026.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
For years, investors believed and followed a “lower for longer” mantra that pushed capital further out along the risk spectrum. It has flowed into private equity, cryptocurrencies, and high-flying tech.