JPMorgan CEO's Annual Shareholder Letter: Beware of Middle East Conflicts, AI, and Private Credit Risks

In the annual letter to shareholders released on June 6 local time, JPMorgan Chase CEO Jamie Dimon highlighted a range of headwinds in the current environment, including persistent inflation, risks of Federal Reserve rate hikes, geopolitical conflicts, turmoil in the private markets, and “bad bank regulation.”

Dimon said that although regulatory measures implemented after the 2008 financial crisis achieved some positive results, they have also created a fragmented, slow-responding system—one that includes costly, duplicative, and burdensome rules. Some of these measures weaken the financial system and reduce productive lending. He specifically pointed to the negative impacts arising from capital and liquidity requirements, the current structure of the Federal Reserve’s stress tests, and more.

Dimon also said that the bank’s views on the revision proposals to the final Basel III rules last month issued by U.S. regulators, and on the Basel surcharge for global systemically important banks (GSIB), were “mixed.” “While it’s good to see that the increase in the recently proposed final Basel III framework (B3E) and the GSIB requirements has been reduced compared with the 2023 proposal, there are still some aspects that are downright absurd.” He said that if calculated based on the proposed total surcharge of roughly 5%, compared with large non-GSIB banks for similar loans, the firm “would need to hold as much as 50% additional capital in the vast majority of loans aimed at U.S. consumers and businesses. Frankly, that doesn’t make sense.”

Risks of persistent inflation and rising interest rates

Jamie Dimon warned that conflicts in the Middle East could trigger a new round of persistent inflation and higher interest rates, which would push the U.S. economy into recession and reshape the global economic order. But he added, “Of course, it might not.”

In the shareholder letter, he predicted that the U.S. economy will be on solid ground this year or at least gain momentum, helped by President Trump’s tax cuts and regulatory easing, pro-business policies, and the “One Big Beautiful Bill” proposed by congressional Republicans, which would contribute $300 billion to the U.S. economy and raise U.S. gross domestic product by about 1%. In addition, large-scale investment in artificial intelligence (AI) and related technologies would also boost U.S. productivity.

In his view, the foundation of the U.S. economy is stronger than in prior years, which may help protect the U.S. from some of the economic crises brewing globally. But that does not mean the possibility of recession does not exist.

“While the economy may be more resilient than before, that doesn’t mean there isn’t a ‘tipping point’; it just means that more factors are needed to reach the tipping point.” Dimon wrote in his 48-page letter, “The Middle East conflict increases the risk of major and sustained shocks to oil and commodities prices. It may also alter global supply chains, similar to what happened after the outbreak of the pandemic. As in 2021 to 2023, we may face another round of stubborn inflation, and to respond to inflation, the Federal Reserve and other global central banks may significantly raise interest rates. Just that alone could lead to higher interest rates and falling asset prices.”

Last week, the S&P 500 posted its worst quarter since 2022. Since late February, the index has been dragged down by the Middle East war and soaring energy prices.

Dimon believes that the gradual rise 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 stock-market gains to stay that way. If these factors turn downward, some risks in the economy could evolve into problems. For example, as long as GDP continues strong growth and interest rates remain at relatively low levels, the burden of large government debt can be kept under control. But Dimon warned that this is only an “if”—if mishandled, debt could evolve into a crisis in the future.

Continuing to lay the groundwork for AI technology

Dimon also reiterated in the letter that the pace of AI adoption is unprecedented. While implementing AI will bring “change,” how this AI revolution will ultimately unfold remains to be seen. “Overall, investment in AI is not a speculative bubble. On the contrary, it will bring significant returns. However, for now, we cannot predict the eventual winners and losers in AI-related industries.” He said that even if it’s difficult to predict, “we also won’t turn a blind eye to this trend. We will deploy AI the way we deploy all other technologies.”

JPMorgan has been leading the way on the “front line” of Wall Street investment banking and has actively introduced AI applications across every layer of its business. This February, Dimon also said that AI technology is reshaping JPMorgan’s workforce, and that the firm has drawn up a “large-scale workforce redeployment plan.” He said, “We focused on some ‘known and predictable’ events, and some ‘known unknown’ events. But major technological shifts like AI also always produce second-order and third-order effects, and those effects could have far-reaching impacts on society… We should also closely watch changes like these.”

Dimon also emphasized that one major issue AI will face next is how governments should help society prepare for the labor-market changes that AI is about to bring.

“The speed at which AI is deployed may outpace the speed at which the workforce adapts to new jobs. Companies and governments can take a range of measures, including incentive measures such as retraining, income support, skills upgrading, and early retirement, for people whose jobs may be adversely affected by AI. AI will affect virtually all functions, applications, and processes within companies. It will certainly eliminate some jobs, while increasing the value of others.” He said.

Turmoil in private credit does not constitute systemic risk

Dimon also discussed turmoil in the U.S. private market. After turmoil late last year, private credit funds have recently again faced large-scale redemption requests due to concerns about loans to software companies. Dimon said, “Overall, private credit tends to lack a high degree of transparency, and loan valuations aren’t rigorous enough. As a result, even if actual losses have hardly changed, this characteristic increases the likelihood that investors will sell when the outlook deteriorates. In the current environment, actual investor losses are indeed higher than they should be.”

He expected that “no matter how events develop, it is foreseeable that insurance regulators will, sooner or later, insist on stricter rating standards or downgrade more private credit firms’ ratings.” However, he added that although investors have recently pulled out of related funds due to concerns that advances in AI technology could harm underlying borrowers, the private credit industry “may” not pose a systemic risk.

Dimon has long been cautious about the boom in private credit, but he also allows JPMorgan to be deeply involved so that it doesn’t lose competitiveness in the business of major private equity clients. At present, the firm has allocated $50 billion of balance-sheet resources to make private loans to clients.

At the end of March this year, Dimon ordered a comprehensive review of the firm’s loan books to assess exposure to loans to software companies, and restricted its credit authority for some software risk exposures held by certain private credit funds. At the same time, the firm also created short-selling strategies for investor clients such as hedge funds, targeting exposures related to private credit.