Ray Dalio Warns Stock Market’s Buffer Against Rising Yields Is Eroding

Billionaire investor Ray Dalio cautioned that the stock market is losing its protective buffer against climbing bond yields, a shift that could expose equities to greater volatility as financial conditions tighten. Speaking to CNBC at the Milken Institute Asia Summit in Singapore on Thursday, Dalio noted that while robust earnings growth has allowed stocks to withstand the global bond sell-off, that advantage is rapidly diminishing.

“We’re in the part of the cycle where interest rates can rise without sending the equity market down because there’s enough earnings growth and there’s enough expected return,” Dalio told CNBC’s Sri Jegarajah. “But when that cushion comes down, then you’re coming later into that cycle. So that’s where we are.”

The warning emerges as U.S. Treasury yields remain near multi-decade highs, driven by substantial government deficits, lingering inflation, and surging borrowing costs associated with artificial intelligence investments. Dalio explained that equities initially offered significantly higher expected returns than bonds, sustaining demand even as borrowing costs rose. However, as stock prices have climbed alongside bond yields, the relative appeal of equities has weakened, leading to widening credit spreads.

Dalio also highlighted a potential disconnect between corporate profitability and liquidity. He urged investors to look beyond headline earnings figures and focus on free cash flow, predicting that while profits may continue to improve, cash generation could deteriorate. “If you’re earning and then you’re investing and you’re not getting money out of that, you have a liquidity issue that’s evolving,” he said.

Furthermore, Dalio anticipates the bond bear market has further to run. He pointed to intense competition for capital between governments financing fiscal deficits and companies funding technology investments as a primary driver of upward pressure on interest rates. While he stopped short of forecasting an immediate market correction, he noted that the current tightening process is only beginning and that higher borrowing costs will eventually constrain credit and spending, potentially weighing on economic activity and equities alike.