Ray Dalio, founder of Bridgewater Associates, stated that the protective buffer for stocks against rising bond yields is rapidly diminishing. Speaking at the Milken Institute Asia Summit in Singapore, Dalio noted that while corporate profits have previously shielded equities, this advantage is fading as the economic cycle progresses.
The 10-year Treasury yield currently fluctuates between 5.3% and 5.36%, reaching levels not observed since the early 2000s. Strategist Stan Wong indicated that yields exceeding 5.25% increase the requirements for stocks, forcing companies to demonstrate stronger growth and cash flow to justify their market premiums.
Dalio highlighted that heavy capital expenditure by technology firms investing in artificial intelligence infrastructure is putting pressure on free cash flow. While reported earnings may continue to rise, he warned that free cash flow could deteriorate, creating a potential warning sign for investors.
The investor described the current global bond market as a bear market, driven by government deficit financing and corporate borrowing for new technologies. Dalio noted that credit spreads are beginning to widen, signaling a reduction in the margin for error for equity market participants.
