Ray Dalio says the earnings growth that has let stocks absorb rising bond yields is narrowing, and he expects corporate free cash flow to deteriorate even as profits keep climbing. The Bridgewater Associates founder also said the global bond sell-off has further to run as governments and companies compete for capital.
Ray Dalio warned on Thursday that stocks face mounting pressure from rising bond yields and weaker corporate cash flows, even as earnings keep growing. The Bridgewater Associates founder spoke to CNBC at the Milken Institute Asia Summit in Singapore.
Dalio said equities have so far weathered the global bond sell-off because earnings growth has kept expected stock returns attractive relative to bonds. But that advantage will narrow, he said, potentially leaving equities more exposed as financial conditions tighten.
Earnings cushion narrows
Dalio told CNBC's Sri Jegarajah that the market is currently in a phase where interest rates can rise without dragging equities down, because there's still enough earnings growth and expected return to support stocks. But once that cushion fades, he said, the cycle moves into a later, more vulnerable stage.
His warning comes as U.S. Treasury yields hover near multi-decade highs, with investors weighing large government deficits, persistent inflation and borrowing tied to artificial intelligence investment. Dalio said equities entered the current cycle with significantly higher expected returns than bonds, which helped sustain demand for stocks even as borrowing costs rose. As stock prices climb and bond yields increase, however, that relative advantage shrinks, leaving less room for equities to absorb higher rates. He added that credit spreads have started to widen as a result.
Free cash flow over earnings
Dalio also cautioned that investors may be overlooking weaker corporate cash generation even as headline earnings keep improving. Asked whether companies can sustain profit growth in the third quarter, he said investors should focus on free cash flow rather than earnings alone, since a company earning money but not converting it to cash faces a liquidity issue.
He stopped short of predicting an earnings decline or an imminent stock market correction, saying financial conditions have not yet tightened enough to significantly curb credit and spending.
Bond sell-off has further to run
Dalio expects the global bond sell-off to continue as governments and companies compete for capital, with mounting debt issuance pressuring investor demand. Governments are borrowing heavily to finance deficits while companies raise funds for emerging technologies, an imbalance he said could keep pushing interest rates higher.
According to CNBC: "We are in a bond bear market, that's I think, pretty clear", Dalio said, adding there is more decline to come. He said higher borrowing costs will eventually force a reduction in credit and spending, weighing on economic activity and potentially spilling into equity markets.
Source: CNBC
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