JPMorgan Chase CEO Annual Shareholder Letter: Watch Out for Middle East Conflict, AI, and Private Credit Risks

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In the annual letter to shareholders released on the 6th local time, JPMorgan Chase CEO Jamie Dimon emphasized several adverse factors in the current environment, including persistent inflation, Federal Reserve rate hike risks, geopolitical conflicts, turmoil in the private markets, and “poor banking regulation.”

Dimon stated that while regulatory measures implemented after the 2008 financial crisis have achieved some positive results, they have also created a fragmented, slow-to-react system, which includes costly, redundant, and cumbersome regulations. Some of these have weakened the financial system and reduced productive lending. He specifically mentioned the negative impacts of capital and liquidity requirements, the current structure of Federal Reserve stress tests, and other factors.

Dimon also said that JPMorgan’s mixed reactions to the revised proposal of the final Basel III agreement and the additional surcharge for Global Systemically Important Banks (GSIBs), released last month by U.S. regulators, reflect this. “While we’re pleased to see that the recent Basel III final proposal (B3E) and GSIB requirements are lower than the 2023 plan, some aspects remain utterly absurd.” He added that if the surcharge is calculated at about 5% of the total, compared to similar loans to large non-GSIB banks, the bank “would need to hold up to 50% extra capital on most loans to U.S. consumers and businesses. Frankly, that’s unreasonable.”

Continued Inflation and Rising Interest Rate Risks

Jamie Dimon warned that conflicts in the Middle East could trigger a new round of sustained inflation and rising interest rates, potentially plunging the U.S. economy into recession and reshaping the global economic order. But he also added, “Of course, it might not.”

In his shareholder letter, he forecasted that the U.S. economy could perform well this year, with President Trump’s tax cuts, deregulation, pro-business policies, and the “One Big Beautiful Bill” proposed by Congressional Republicans contributing $300 billion to the U.S. GDP, boosting growth by about 1%. Additionally, massive investments in artificial intelligence (AI) and related technologies will also drive productivity gains.

In his view, the U.S. economy’s current foundation is more solid than in previous years, which might shield it from some brewing global economic crises, but that doesn’t mean the risk of recession is nonexistent.

“While the economy may be more resilient than in the past, that doesn’t mean there’s no ‘tipping point’; it just means more factors are needed to reach it,” Dimon wrote in his 48-page letter. “The Middle East conflict increases the risk of significant and sustained shocks to oil and commodity prices. It could also alter global supply chains, similar to the post-pandemic situation. Just like from 2021 to 2023, we might face a new wave of stubborn inflation, with the Fed and other global central banks possibly raising interest rates sharply to combat inflation. This alone could lead to rising rates and falling asset prices.”

Last week, the S&P 500 experienced its worst quarter since 2022, dragged down by the Middle East conflict and soaring energy prices since late February.

Dimon believes that gradual increases in inflation and interest rates could lead to a decline in the stock market this year. He also warned that although the economy remains strong, it relies on growth and rising stock prices to sustain itself. If these factors weaken, some risks in the economy could turn into problems. For example, as long as GDP maintains strong growth and interest rates stay relatively low, the huge government debt burden can be managed. But Dimon cautioned that this is just an “if”; mismanagement could turn debt into a crisis in the future.

Further Investment in AI Technology

Dimon reiterated that the speed of AI adoption is unprecedented. While AI will bring “transformational” changes, how this AI revolution will unfold remains to be seen. “Overall, investments in AI are not a speculative bubble. On the contrary, they will generate significant returns. However, we cannot currently predict the ultimate winners and losers in AI-related industries.” He added that even if predictions are difficult, “we will not ignore this trend. We will deploy AI technologies just as we have deployed other technologies.”

JPMorgan has been at the forefront of Wall Street investment banks, actively integrating AI into various aspects of its business. In February, Dimon also stated that AI is reshaping JPMorgan’s workforce, and the bank has developed a “large-scale employee redeployment plan.” He said, “We are paying attention to some ‘known and predictable’ events, as well as some ‘known unknowns.’ But major technological shifts like AI always produce second- and third-order effects, which can have profound societal impacts… We should also closely monitor these kinds of transformations.”

Dimon emphasized that a major upcoming issue for AI is how governments can help society prepare for the labor market changes AI will bring.

“AI’s deployment speed may outpace workers’ ability to adapt to new jobs. Both companies and governments can take various measures—such as retraining, income support, skill upgrades, early retirement incentives—to help those whose jobs might be negatively affected by AI. AI will impact nearly all functions, applications, and processes within companies. It will certainly eliminate some jobs but also enhance the value of others,” he said.

Private Credit Market Turmoil Does Not Constitute Systemic Risk

Dimon also discussed turbulence in the U.S. private markets. After last year’s upheaval, recent concerns about loans to software companies have led to large redemption requests for private credit funds. Dimon stated, “Overall, private credit often lacks high transparency, and loan valuations are not rigorous enough. As a result, even if actual losses are minimal, this characteristic increases the likelihood of investors selling off in adverse environments. In the current climate, actual losses have indeed exceeded what would be expected.”

He predicted, “Regardless of how things develop, it’s foreseeable that insurance regulators will eventually insist on stricter rating standards or downgrade more private credit institutions.” However, he added that despite recent investor withdrawals due to fears that AI advancements might harm underlying borrowers, the private credit industry “may” not pose a systemic risk.

Dimon has long maintained a cautious stance on the private credit boom but also allows JPMorgan to deepen involvement to stay competitive with large private equity clients. Currently, the bank has allocated $50 billion in assets and liabilities for private loans.

By the end of March this year, Dimon ordered a comprehensive review of the bank’s loan book, assessing exposure to software company loans, and limited credit permissions for some private credit funds’ software risk exposure. Meanwhile, the bank also created short-selling strategies targeting private credit-related exposures for hedge funds and other investor clients.

（This article is from First Financial）