Key Takeaways
- • Ray Dalio, founder of Bridgewater Associates, told CNBC that strong corporate earnings have cushioned stocks against rising interest rates, but that cushion is shrinking as bond yields climb.
- • The benchmark 10-year US Treasury yield hit 5.36% in the week reported, its highest level since 2002, according to the article.
- • The S&P 500 is up more than 13% year to date despite pulling back from a recent record high, driven by AI enthusiasm and robust earnings.
- • Dalio said the AI infrastructure buildout is intensifying competition for capital alongside heavy government borrowing, adding upward pressure on financing costs.
- • Dalio noted corporate credit spreads remain narrow and financial conditions have not yet tightened enough to constrain access to capital, though investors are becoming more selective.
Summary
Bridgewater Associates founder Ray Dalio told CNBC on Thursday that the equity market's margin for error is narrowing as bond yields rise. Dalio said that when the current cycle began, expected equity returns were much higher than expected bond returns, but that pricing gap has changed. "Because of that change in pricing, that cushion has come down," he said.
The benchmark 10-year Treasury yield reached 5.36% this week, its highest level since 2002, as investors weighed persistent inflation, heavy government borrowing, and expectations that the Federal Reserve will keep rates higher for longer. Higher yields make fixed-income investments more attractive relative to equities, leaving stocks less room to absorb further increases in borrowing costs. Despite this, US equities have held up. The S&P 500 is up more than 13% this year, though it has pulled back from a recent record high, with enthusiasm for artificial intelligence and solid corporate earnings powering much of the rally.
Dalio said strong earnings growth has so far offset the drag from higher rates. "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," he said. "But when that cushion comes down, then you're coming later into that cycle."
Dalio also highlighted the competition for capital created by the AI buildout. Financing the large infrastructure required for AI is drawing investor money at the same time governments are issuing significant debt, adding to pressure on financing costs. Still, he said financial conditions have not yet tightened enough to meaningfully restrict access to capital, pointing to relatively narrow corporate credit spreads as evidence that investors remain willing to lend to companies at modest premiums. "We know that we haven't yet put the brakes on," he said, adding that investors are only beginning to be more selective about where they deploy capital.
The benchmark 10-year Treasury yield reached 5.36% this week, its highest level since 2002, as investors weighed persistent inflation, heavy government borrowing, and expectations that the Federal Reserve will keep rates higher for longer. Higher yields make fixed-income investments more attractive relative to equities, leaving stocks less room to absorb further increases in borrowing costs. Despite this, US equities have held up. The S&P 500 is up more than 13% this year, though it has pulled back from a recent record high, with enthusiasm for artificial intelligence and solid corporate earnings powering much of the rally.
Dalio said strong earnings growth has so far offset the drag from higher rates. "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," he said. "But when that cushion comes down, then you're coming later into that cycle."
Dalio also highlighted the competition for capital created by the AI buildout. Financing the large infrastructure required for AI is drawing investor money at the same time governments are issuing significant debt, adding to pressure on financing costs. Still, he said financial conditions have not yet tightened enough to meaningfully restrict access to capital, pointing to relatively narrow corporate credit spreads as evidence that investors remain willing to lend to companies at modest premiums. "We know that we haven't yet put the brakes on," he said, adding that investors are only beginning to be more selective about where they deploy capital.
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