Ray Dalio Warns Stocks Face Pressure from Rising Bond Yields

Billionaire investor Ray Dalio warns that the buffer protecting stocks from rising bond yields is rapidly diminishing. This warning coincides with the 10-year Treasury yield nearing multi-decade highs, currently hovering around 5.3% to 5.36%. Dalio explains that as bond yields rise, they compete with stocks for capital, making stocks less attractive unless they can demonstrate stronger growth. He noted at the Milken Institute Asia Summit in Singapore that while strong corporate profits have shielded equities, this advantage is narrowing. Investors in the late stage of the cycle face reduced protection as the cushion shrinks, leading to wider credit spreads. Factors contributing to this pressure include large government deficits, persistent inflation, and significant corporate borrowing for AI infrastructure. Dalio emphasizes the importance of free cash flow, which may deteriorate despite improving earnings due to heavy capital spending by tech firms. He describes the current environment as a bond bear market, driven by governments financing deficits and companies raising funds for new technologies. While some research from Goldman Sachs suggests equities often gain in the year following rate hikes, Dalio refrains from predicting an imminent crash, noting that financial conditions have not tightened enough to sharply curb credit and spending, although the margin for error is decreasing.

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