Ray Dalio Warns the Stocks Are Losing Their Cushion, and the Worst May Be Ahead

Ray Dalio Warns Stocks Losing Cushion Amid Rising Bond Yields

Earnings vs Free Cash Flow

Billionaire investor Ray Dalio says the buffer protecting stocks from rising bond yields is shrinking fast. His warning comes as the 10-year Treasury yield hovers near multi-decade highs. Dalio argues that strong corporate profits have so far shielded equities, but the advantage is narrowing as the cycle advances.

Pressure on Yields

Several pressures explain the squeeze. Large government deficits, persistent inflation, and heavy corporate borrowing for artificial intelligence infrastructure keep pressure on yields upward. The U.S. 10-year Treasury yield hovers near 5.3% to 5.36%, levels last seen in the early 2000s. Strategist Stan Wong noted that yields above 5.25% raise the bar for stocks. Equities must then deliver stronger growth and cash flow to justify their premium over bonds.

Bond vs Equity Valuations

Dalio says investors should look beyond headline earnings. He stresses free cash flow, which measures the cash a company keeps after funding its operations and investments. He expects earnings to keep improving, but free cash flow could deteriorate. Heavy capital spending by technology firms building AI capacity already squeezes cash flow even as reported profits rise.

Global Bond Sell-Off

Dalio also believes the global bond sell-off has further to run. He called it a bond bear market and pointed to governments financing deficits and companies raising funds for new technologies. Over long periods of time, debts tend to rise faster than incomes, creating the long-term debt cycle. Even as people become more indebted, lenders freely extend credit because during economic booms, incomes rise, asset values soar, and the stock market thrives.