Dalio's Annual Outlook: AI is in the early stage of a bubble; beware of these risks in 2026

Author: Bridgewater Founder Ray Dalio

Translation and Compilation: BitpushNews

As a systematic global macro investor, as we bid farewell to 2025, I naturally reflect on the underlying mechanisms of the events that occurred, especially the market performance. This is the main focus of today’s reflection.

While facts and returns are indisputable, my perspective on issues differs from most people.

Although most believe that U.S. stocks, especially U.S. AI stocks, are the best investments for 2025 and the core story of the year, the undeniable fact is that the most substantial returns (and the real headline story) come from: 1) changes in the value of money (most importantly the US dollar, other fiat currencies, and gold); and 2) U.S. stock performance significantly underperformed non-U.S. stocks and gold (gold was the best-performing major market). This was mainly driven by fiscal and monetary stimulus, productivity improvements, and large-scale asset reallocation from the U.S. market.

In these reflections, I want to step back and examine how last year’s dynamics of money/debt/markets/economy operated, and briefly touch on how the other four major drivers—politics, geopolitics, natural behaviors, and technology—affected the global macro landscape within the evolving “Big Cycle” context.

1. Changes in the value of money

Regarding the value of money: the USD depreciated 0.3% against the JPY, 4% against the CNY, 12% against the EUR, 13% against the CHF, and gold plummeted 39% (gold is the second-largest reserve currency and the only major non-credit currency).

Therefore, all fiat currencies are depreciating. The biggest story and market volatility of the year stemmed from the weakest currency experiencing the largest decline, while the strongest/hardest currencies appreciated the most. The most outstanding major investment last year was going long gold (with a 65% return in USD), outperforming the S&P 500 index (18% return in USD) by 47 percentage points. In other words, measured in gold terms, the S&P index actually declined by 28% in real terms.

Let’s remember some key principles related to the current situation:

• When a country’s currency depreciates, things priced in that currency appear to be rising. In other words, viewing investment returns through the lens of a weak currency makes them seem stronger than they actually are. In this case, the S&P’s return to USD investors was 18%, to JPY investors 17%, to CNY investors 13%, but only 4% to EUR investors, and just 3% to CHF investors, while for gold-based investors, the return was -28%.
• Currency fluctuations are crucial for wealth transfer and economic direction. When a currency depreciates, it reduces an individual’s wealth and purchasing power, making their goods and services cheaper in others’ currencies, while making others’ goods and services more expensive in their own currency. This influences inflation and trade relations, though with a lag.
• Whether you hedge currencies (Currency Hedged) is very important. If you do not, and do not want to form a view on currencies, what should you do? You should always hedge into the currency basket with the least risk and make tactical adjustments when you believe you can do well. I will explain how I operate later.

Regarding bonds (debt assets): since bonds are promises to deliver currency, when the value of currency declines, even if nominal prices rise, their real value decreases. Last year, the 10-year U.S. Treasury yield was 9% in USD (roughly half from yield and half from price), 9% in JPY, 5% in CNY, but -4% in EUR and CHF, and -34% in gold terms—cash was a worse investment.

You can understand why foreign investors dislike USD bonds and cash (unless they hedge currencies).

So far, bond supply and demand imbalances are not a serious issue, but in the future, a large amount of debt (nearly $10 trillion) will need to be rolled over. Meanwhile, the Fed seems inclined to cut rates to suppress real interest rates. Therefore, debt assets lack attractiveness, especially on the long end of the curve, and a further steepening of the yield curve seems inevitable, but I doubt whether the Fed’s easing will be priced in as much as currently reflected.

2. U.S. stocks significantly underperformed non-U.S. stocks and gold

As mentioned earlier, while U.S. stocks performed strongly in USD terms, they lagged considerably in strong currencies and underperformed stocks in other countries. Clearly, investors prefer holding non-U.S. stocks and bonds over U.S. assets.

Specifically, European stocks outperformed U.S. stocks by 23%, Chinese stocks by 21%, UK stocks by 19%, and Japanese stocks by 10%. Emerging markets stocks performed even better, with a return of 34%, emerging market USD bonds returning 14%, and emerging market local currency bonds (USD-denominated) returning 18%. In other words, wealth is undergoing a significant flow and value transfer from the U.S., which could lead to more rebalancing and diversification.

Regarding last year’s U.S. stocks, the strong results were driven by earnings growth and P/E expansion.

Specifically, earnings grew 12% in USD, P/E expanded about 5%, and with about 1% in dividends, the S&P total return was approximately 18%. The “Big Seven” tech giants, accounting for about one-third of the market cap, saw earnings grow 22% in 2025, while the other 493 stocks grew earnings by 9%.

Within earnings growth, 57% was due to sales growth (7%), and 43% due to profit margin expansion (5.3%). Much of the margin expansion may be attributed to technological efficiency, but data limitations make this hard to confirm.

In any case, profit improvement mainly stems from the “economic cake” getting bigger, with capitalists capturing most of the gains and workers sharing less. Monitoring profit margins will be very important in the future, as the market currently expects this growth to continue, while left-wing political forces are trying to regain a larger share.

3. Valuations and future expectations

Although the past is easy to know and the future difficult to predict, understanding causality helps us forecast the future. Currently, P/E ratios are high, and credit spreads are very low, making valuations appear overly stretched. History shows this often signals lower future stock market returns. Based on current yields and productivity levels, my long-term stock return expectation is only 4.7% (at a historic low), which is very low compared to the 4.9% yield on bonds, indicating extremely low stock risk premiums.

This means that little more return can be squeezed from risk premiums, credit spreads, and liquidity premiums. If rising supply and demand pressures from currency depreciation push interest rates higher, it will have a significant negative impact on credit and stock markets.

The two major uncertainties are Fed policy and productivity growth. The new Fed Chair and committee seem inclined to suppress nominal and real interest rates, which will support prices and inflate bubbles. Productivity in 2026 will improve, but how much of that will translate into profits rather than being used for tax increases or wage expenditures (classic left-right issues) remains uncertain.

In 2025, Fed rate cuts and credit easing lowered discount rates, supporting assets like stocks and gold. Now, these markets are no longer cheap. Notably, these reflation measures have not benefited illiquid markets such as venture capital (VC), private equity (PE), and real estate. If their debt is forced to refinance at higher rates, liquidity pressures could cause these assets to fall sharply relative to liquid assets.

4. Political order transformation

In 2025, politics played a central role in driving markets:

• Trump administration’s domestic policies: a leveraged bet on revitalizing American manufacturing and AI technology.
• Foreign policy: scared off some foreign investors, with sanctions and conflicts fueling diversification and gold purchases.
• Wealth gap: the top 10% of capitalists own more stocks and see faster income growth; they do not see inflation as a problem, while the bottom 60% feel overwhelmed.

“Money value/purchasing power” will become the top political issue next year, potentially leading to the Republicans losing the House and triggering chaos in 2027. On January 1, Zohran Mamdani, Bernie Sanders, and AOC united under the banner of “Democratic Socialism,” signaling a fierce battle over wealth and money.

5. Global order and technology

In 2025, the global order shifted clearly from multilateralism to unilateralism (power politics). This led to increased military spending, debt expansion, protectionism, and de-globalization. Gold demand strengthened, while demand for U.S. debt and dollar assets decreased.

In terms of technology, the AI wave is currently in the early bubble stage. I will soon release my bubble indicator report.

Summary

In summary, I believe that debt/money/markets/economy forces, domestic politics, geopolitics (military spending), natural forces (climate), and new technology (AI) will continue to be the main drivers reshaping the global landscape. These forces will largely follow the “Big Cycle” template I outlined in my book.

Regarding portfolio positioning, I don’t want to be your investment advisor, but I hope to help you invest better. The most important thing is to have independent decision-making ability. You can infer my position directions from my logic. If you want to learn how to do better, I recommend the “Dalio Principles of Market” course offered by the Singapore Wealth Management Institute (WMI).

*Since Q4 results have not yet been officially announced, the above data are estimates.

When these premiums/spreads narrow, it will exert upward pressure on the stock market.