Ray Dalio, the billionaire founder of Bridgewater Associates, is sounding an alarm about the fragile balance currently sustaining the stock market. Speaking at the Milken Institute Asia Summit in Singapore, Dalio explained that equities have managed to survive a brutal global bond sell off primarily because strong earnings growth made stocks look attractive compared to fixed income. However, he believes this protective layer is thinning rapidly as bond yields climb toward multi decade highs.

According to Dalio, investors have been riding a wave where high expected returns provided a sufficient buffer against rising interest rates. That luxury is disappearing as stock prices rise and borrowing costs mount, leaving portfolios more exposed to volatility. He noted that signs of this shift are already appearing in widening credit spreads, suggesting that the margin for error in the current financial cycle has shrunk considerably.

Beyond interest rates, Dalio urged a closer look at how companies are actually managing their money. While headline earnings might still look healthy on paper, he warned that free cash flow could be deteriorating behind the scenes. If corporations spend too aggressively on investments without seeing immediate liquid returns, they risk facing significant liquidity issues regardless of what their profit reports say.

Looking ahead, the outlook for bonds remains bleak according to the hedge fund pioneer. With governments running massive deficits and tech firms borrowing heavily to fuel the artificial intelligence boom, Dalio expects the bond bear market to persist. While he isn’t calling for an immediate crash, he suggests that once these tighter financial conditions finally choke off spending and credit, the impact will inevitably spill over into equity markets.