By Teresa Rivas

The stock market's rally has seemed invincible recently, but this past week showed at least one thing that has the potential to cause investors to forget about the artificial-intelligence frenzy -- a good, old-fashioned credit scare. And who isn't scared of cockroaches?

JPMorgan Chase CEO Jamie Dimon used that insect imagery, warning that the recent bankruptcies of two auto-related firms, Tricolor and First Brands, could be just the first dominoes to fall, to mix a metaphor. Dimon's words proved accurate almost immediately, with news from two regional banks. Zions Bancorp said it would take a $50 million charge-off related to potentially fraudulent loans, while Western Alliance Bancorp stated in a filing that it had sued a borrower in August, seeking to recover $100 million. That sent shares of regional banks -- and the stock market -- sinking on Thursday.

The damage, however, was contained enough that the major indexes still were on track to finish the week higher. The Dow Jones Industrial Average was set to advance 1.7% for the week, while the S&P 500 was up 1.8% and the Nasdaq Composite was gaining 2.2%.

Yet the headlines have left investors uneasy. The issue is the nature of the credit itself, as nonfinancial depository institution loans, or NFDIs, can be murky, funding less-transparent borrowers like hedge funds for their own financial activities. NDFIs now account for some 33% of all commercial and industrial loans originated by large banks, according to J.P. Morgan data. "The scary element of this story is with NDFI's less stringent lending standards, we must assume there is more out there, " notes Pave Finance Chief Market Strategist Peter Corey.

Anyone who lived through the 2008-09 financial crisis will remember how quickly complex lending products can sour, and the increase in private credit means there may be other questionable loans with potential ties to bigger institutions. "Private lending has exploded in recent years," notes Muriel Siebert Chief Investment Officer at Mark Malek, to the point that "trillions of dollars have poured into funds managed by private credit giants like Apollo, Ares, Blackstone, KKR, and enough Greek gods to fill Mount Olympus...we are talking about institutions, pensions, and endowments funding opaque pools of leveraged loans that are not publicly traded, not stress-tested, and not fully understood."

Even if there aren't any more cockroaches, the credit scare could still put a damper on the economy. It's surely a given that lenders of all stripes are now taking a closer look at their own loan books and raising their standards on new ones. "[It] is likely to force all lenders to tighten their processes at least a bit in the fourth quarter," writes Macquarie Group Global Forex and Rates Strategist Thierry Wizman. "And that can have economic repercussions."

That's not what bulls want to hear when stocks are priced for further expansion. It isn't necessarily great news for AI either, given that even deep-pocketed players have started issuing debt to fund investments.

Of course, this bull market already beat one mini credit crisis, with 2023's collapse of Silicon Valley Bank. And other metrics are still mostly on track, including AI, productivity gains, and slowing inflation. That means the recent tribulations may be more of a "cautionary signal, not a prediction of collapse, as systemwide capital remains relatively strong," notes Debtwire Global Head of Credit Research Tim Hynes.

Some investors might even be taking advantage of the turmoil, as evidenced by Friday's bounce. "At its core, this is still a bull market undoubtedly," says Ken Mahoney, CEO of Mahoney Asset Management. "This volatility should breed some solid opportunities."

If only stocks weren't so expensive. The S&P 500 trades at 22.6 times 12-month forward earnings, a sign that investors are expecting a lot of good news and not much bad.

Still, when stocks are priced to perfection, anything other than that can cause big problems -- even a cockroach.

Write to Teresa Rivas at teresa.rivas@barrons.com

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October 17, 2025 14:56 ET (18:56 GMT)

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