Ray Dalio Warns the Stocks Are Losing Their Cushion, and the Worst May Be Ahead
Billionaire investor Ray Dalio says the buffer defending shares from rising bond yields is shrinking quick. His warning comes as the 10-year Treasury yield hovers close to multi-decade highs.
Here is what his argument means for earnings, money stream, and traders watching the bond market.
Why Rising Bond Yields Pressure Stock Prices
Bond yields are the returns traders earn on authorities debt, and they compete with shares for capital. When yields rise, bonds look safer, so shares should supply stronger progress to justify their threat.
Ray Dalio says shares can take in larger yields so long as earnings continue to grow quick sufficient. He told CNBC at the Milken Institute Asia Summit in Singapore that robust company income have up to now shielded equities.
That benefit is narrowing as the cycle advances. Dalio, the Bridgewater Associates founder, mentioned traders coming into a late stage have less protection once the cushion shrinks.
“Because of that change in pricing, that cushion has come down, and so now you’re beginning to see credit score spreads begin to widen,” Dalio famous.
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Several pressures clarify the squeeze. Large authorities deficits, persistent inflation, and heavy company borrowing for synthetic intelligence infrastructure keep pressure on yields upward. The U.S. 10-year Treasury yield hovers close to 5.3% to five.36%, ranges last seen in the early 2000s.
Strategist Stan Wong noted that yields above 5.25% increase the bar for shares. Equities should then ship stronger progress and money stream to justify their premium over bonds.
Is Free Cash Flow the Next Warning Sign?
Dalio says traders ought to look past headline earnings. He stressed free money stream, which measures the money an organization retains after funding its operations and investments.
He expects earnings to maintain bettering, however free money stream may deteriorate. Heavy capital spending by technology firms building AI capacity already squeezes money stream at the same time as reported income rise.
Dalio additionally believes the world bond sell-off has additional to run. He known as it a bond bear market and pointed to governments financing deficits and corporations elevating funds for brand spanking new applied sciences.
Some Goldman Sachs research affords a extra balanced view. Equities have typically gained over the 12 months after rate-hiking cycles start, although long-duration progress shares stay extra susceptible.
Dalio stopped in need of predicting an imminent crash. Financial circumstances haven’t tightened sufficient to curb credit score and spending sharply. The margin for error, nevertheless, is clearly shrinking.
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