Cracks behind the S&P 500 record high: Financial sector down 6% YTD, $2 trillion private credit undercurrent is spreading

S&P 500 continues to hit new highs while the financial sector has become the weakest, with the accelerating exposure of credit deterioration in the $2 trillion private credit market behind it. (Summary: G20 Financial Stability Board: If central banks cannot effectively regulate "global stablecoins," they should consider a comprehensive ban (FSB)) (Background: FSB | Financial Stability Board publishes "High-Level Recommendations for the Regulation, Supervision and Oversight of Crypto-Asset Activities," strengthening prevention of stablecoin collapse) Editor's Note: As the S&P 500 hits record highs and Q1 earnings growth reaches 27.1%, the financial sector has become the worst performer among the 11 sectors, falling more than 6% year-to-date. The relative performance of XLF against the broader market has fallen to its lowest level since 1998, weaker than during the financial crisis and the COVID-19 pandemic. The driving force behind this is the accelerating exposure of cracks in the $2 trillion private credit market, with Blackstone's flagship fund facing a $3.7 billion redemption wave, and the FSB issuing a systemic risk warning just two days ago. The S&P 500 closed at a record high of 7,209 points in April, with Q1 earnings growth of 27.1%, the highest since Q4 2021, and 84% of constituents beating expectations. On the surface, the U.S. stock market has never looked healthier. However, the financial sector is sending a very different signal. The XLF ETF, which tracks the sector, has fallen more than 6% year-to-date, making it the worst-performing sector among all 11 S&P 500 industries. The severity of this divergence has surpassed levels seen during the 2008 financial crisis and the 2020 COVID-19 shock. According to FactSet and MarketWatch data, the relative performance of XLF against the S&P 500 has fallen to its lowest level since its inception in 1998. Scott Brown, founder of Brown Technical Insights, stated bluntly: The U.S. stock market cannot do without the support of the financial sector, and currently, financial stocks are not even participating in the rally. This weakness in the financial sector is particularly counterintuitive. According to FactSet data from May 1, S&P 500 Q1 earnings growth reached 27.1%, the highest since Q4 2021, with revenue growth in the financial sector also ranking in the top four. Major banks such as JPMorgan, Bank of America, and Wells Fargo all reported strong quarterly results in April. But the market is not trading on current quarterly income statements; it is trading on invisible risk exposures on balance sheets. The root of the problem points to private credit. This market, valued at approximately $1.5 to $2 trillion, expanded rapidly in the vacuum left by banks scaling back lending after the 2008 financial crisis and is now deeply intertwined with banks, insurance companies, and asset management institutions. Once credit deterioration occurs, the transmission chain is far longer than what is visible on the surface. JPMorgan CEO Jamie Dimon previously compared the problems emerging in the private credit sector to "cockroaches"—if you see one, there are likely many more behind it. This metaphor is being corroborated by an increasing amount of data. On May 6, the Financial Stability Board (FSB) released a stern report on private credit risks, warning that the market's complexity, high leverage, and deep interconnectedness with the banking system could amplify stress in adverse scenarios, posing risks to broader financial stability. The FSB specifically pointed out that high leverage in private credit is concentrated in the technology, healthcare, and service sectors, which have never been tested by a prolonged economic downturn. The report also highlighted an ominous signal: an increasing number of private credit borrowers are relying on payment-in-kind loans (paying off old debt with new debt rather than cash), which is generally seen as a sign of deteriorating credit conditions. Two days ago, Sarah Breeden, Deputy Governor of the Bank of England, publicly expressed concerns about private credit asset quality, valuation discipline, and liquidity issues. The European Central Bank has also issued similar warnings recently. Barclays disclosed its private credit exposure at $20 billion, and Deutsche Bank at approximately $30 billion. Beyond macro-level warnings, turmoil at the capital level is more direct. According to a Reuters report on March 3, Blackstone's $82 billion flagship private credit fund, BCRED, faced $3.7 billion in redemption requests in the first quarter, a redemption ratio of 7.9% of the fund's assets, the highest record since the fund's inception