Bridgewater founder Ray Dalio said U.S. stocks had been able to withstand selling in bonds largely because rising corporate earnings offered a relative return advantage. Speaking to CNBC at the Milken Institute Asia Summit in Singapore on Oct. 9, he said that cushion is now weakening as stock prices and U.S. Treasury yields rise at the same time, while credit spreads have started to widen. He added that financial conditions have not yet tightened enough to clearly restrain lending and spending.
Dalio said investors should pay closer attention to free cash flow rather than reported earnings alone. In his view, corporate earnings may still improve, but free cash flow could decline if profits keep getting absorbed by capital expenditures instead of turning into cash, creating liquidity strain over time. He said the risk deserves more attention as large technology companies continue spending on AI infrastructure.
On bonds, Dalio said the market remains in a bear phase and may still have room to extend. He pointed to competition for long-term capital as governments finance fiscal deficits and technology companies issue debt for AI buildouts. Higher funding costs, he said, could eventually weigh on credit growth and spending. He did not predict an imminent drop in corporate earnings or a sharp correction in U.S. equities.
Bridgewater founder Ray Dalio said U.S. equities had previously been able to absorb selling in the bond market because corporate earnings growth gave stocks a relative return advantage.
Speaking to CNBC at the Milken Institute Asia Summit in Singapore on Oct. 9, Dalio said that cushion is fading as stock prices and U.S. Treasury yields move higher together. He also said credit spreads have begun to widen, though financial conditions have not yet tightened enough to clearly curb lending and spending.
Focus on free cash flow, not just earnings
Dalio said investors should watch free cash flow rather than relying only on reported earnings. He said corporate earnings may still improve, but free cash flow could fall. If profits continue to be directed into capital expenditures and do not convert into cash, liquidity problems can build over time.
He added that the risk is more worth watching as large technology companies keep spending on AI infrastructure.
Bond bear market may still extend
On the bond market, Dalio said it is currently in a bear market and may still have further to run. He said governments financing fiscal deficits and technology companies issuing debt for AI projects are competing for long-term capital. Higher borrowing costs could eventually weigh on credit expansion and spending.
Dalio did not predict that corporate earnings were about to decline, and he did not say U.S. stocks were on the verge of a sharp pullback.
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