Billionaire Ray Dalio Warns US Stocks Will Give Muted Long-Term Returns — Here's Why
He said, in 2025, the strong equity returns on Wall Street were due to both strong earnings growth and a P/E expansion.
Billionaire veteran hedge fund manager Ray Dalio has warned of muted returns on US stocks in the long term, given currently stretched valuations and currency dynamics.
He pointed to high price-to-earnings multiples and low credit spreads, which makes valuations too steep and portends low future equity returns.
"When I calculate expected returns based on where stock and bond yields are using normal productivity growth and the profits growth that results from it, my long-term equity expected return would be at about 4.7% (a sub-10th percentile reading), which is very low relative to existing bond returns at about 4.9%, so equity risk premiums are low," Dalio said in an article on social media platform X.
He said, in 2025, the strong equity returns on Wall Street were due to both strong earnings growth and a P/E expansion. Earnings of US companies were up 12% in dollar terms, the P/E rose by about 5%, and the dividend yield was about 1%, leading to the total return on the benchmark S&P 500 at 18% in dollar terms.
On the other hand, credit spreads (the yield difference between two bonds with the same maturity but different credit quality) contracted to "very low levels" last year, which was a positive for lower credit and equity assets. But this leaves the low spreads less likely to decline further and more likely to rise, which is a negative for these assets, Dalio explained.
"All this means that there isn't much more return that can be squeezed out of the equity risk premiums, credit spreads, and liquidity premiums," he said.
Moreover, if the US Federal Reserve raises interest rates amid declining value of the dollar, Dalio said it will have a large negative effect on the credit and stock markets.
The greenback fell by 0.3% against the yen last year, 4% against the Chinese renminbi yuan, 12% against the euro, 13% against the Swiss franc, and 39% against gold.
In this backdrop, Dalio explained that looking at the investment returns through the lens of a weak currency (USD in this case) makes them look stronger than they really are.
Consequently, the S&P 500 returned 18% for a dollar-based investor, 17% for a yen-based investor, 13% for a renminbi-based investor, only 4% for a euro-based investor, only 3% for a Swiss franc-based investor, and, for a gold-based investor, it returned -28%, he said.
