Author: Ray Dalio, Founder of Bridgewater Associates Ray Dalio is an American billionaire investor, businessman, and economist. He
Compilation and organization:BitpushNews
As a systematic global macro investor, as I bid farewell to 2025, I naturally reflect on the underlying mechanisms of the events that have transpired, particularly in terms of market performance. This is the central theme of today's reflection.
Although the facts and return rates are indisputable, I view the issue from a different perspective than most people.
Although most people believe that U.S. stocks, especially U.S. AI stocks, are the best investments of 2025 and the central story of the year, the undeniable fact is that the most substantial returns (and the real headline stories) have come from: 1) changes in the value of money (most notably the U.S. dollar, other fiat currencies, and gold); and 2) U.S. equities significantly underperforming non-U.S. equities and gold (which was the top-performing major market). This is primarily driven by fiscal and monetary stimulus, productivity gains, and a large-scale reallocation of assets away from U.S. markets.
In these reflections, I would like to take a step back to examine how the dynamics of money, debt, markets, and the economy played out last year, and briefly touch on the other four major drivers—politics, geopolitics, natural behavior, and technology—and how they have influenced the global macroeconomic landscape within the context of the evolving "Big Cycle."
1. Changes in the value of money
About the value of money:The US dollar fell 0.3% against the Japanese yen, 4% against the Chinese yuan, 12% against the euro, 13% against the Swiss franc, and plummeted 39% against gold (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 this year stemmed from the fact that the weakest fiat currencies fell the most, while the strongest/hardest currencies rose the most. Last year's most outstanding major investment was going long on gold (65% return in U.S. dollars), which outperformed the S&P 500 index (18% return in U.S. dollars) by 47 percentage points. In other words, when measured in gold, the S&P 500 index actually declined by 28%.
Let's keep in mind some key principles related to the current situation:
When a country's currency depreciates, it makes things priced in that currency appear to increase in value. In other words, viewing investment returns through the lens of a weakening currency makes them appear stronger than they actually are. In this case, the S&P index delivers an 18% return for dollar investors, 17% for yen investors, 13% for RMB investors, but only 4% for euro investors, 3% for Swiss franc investors, and -28% for investors using gold as their benchmark.
Changes in currency are crucial to wealth redistribution and the direction of the economy. When a currency depreciates, it reduces an individual's wealth and purchasing power. It makes their goods and services cheaper in terms of other currencies, while making foreign goods and services more expensive in terms of their own currency. In this way, it affects inflation rates and trade relationships, although these effects are often delayed.
Whether you have hedged against currency risk is very critical. If you don't want to or are not willing to express views on currencies, what should you do? You should always hedge into the currency basket with the least risk for you, and make tactical adjustments from there when you believe you are capable of doing so effectively. I'll explain later how I do this.
Regarding bonds (i.e., debt assets):Because bonds are promises to deliver money, when the value of money falls, their real value declines even if their nominal prices rise. Last year, the 10-year U.S. Treasury bond returned 9% in U.S. dollar terms (about half from yield and half from price appreciation), returned 9% in Japanese yen terms, 5% in Chinese yuan terms, but returned -4% in both euro and Swiss franc terms, and -34% in gold terms—while cash was an even worse investment.
You can understand why foreign investors are not fond of dollar bonds and cash (unless they have hedged the currency risk).
So far, the imbalance between bond supply and demand is not yet a serious issue, but a large amount of debt (nearly $10 trillion) will need to be rolled over in the future. At the same time, the Federal Reserve appears inclined to cut interest rates to lower real interest rates. As a result, debt assets are becoming less attractive, especially for the long end of the yield curve. A further steepening of the yield curve seems inevitable. However, I doubt whether the Fed will ease monetary policy as aggressively as currently priced in.
2. U.S. stocks significantly underperform non-U.S. stocks and gold.
As previously mentioned, although U.S. stocks have performed strongly in dollar terms, they have lagged significantly when adjusted for currency strength and have underperformed stocks from other countries. Clearly, investors are more inclined to hold non-U.S. stocks and non-U.S. bonds rather than U.S. assets.
Specifically, European equities outperformed U.S. equities by 23%, Chinese equities by 21%, U.K. equities by 19%, and Japanese equities by 10%. Emerging market equities performed even better overall, delivering a 34% return, while emerging market U.S. dollar-denominated bonds returned 14%, and emerging market local-currency bonds (measured in U.S. dollars) returned 18% overall. In other words, a significant shift and transfer of wealth is occurring from the United States to other regions, which could lead to more rebalancing and diversified asset allocation.
Last year's performance in the U.S. stock market was driven by earnings growth and an expansion in price-to-earnings (P/E) ratios.
Specifically, earnings in U.S. dollars increased by 12%, the P/E ratio expanded by about 5%, and with approximately 1% in dividends, the S&P 500's total return was about 18%. The "Big Seven Tech" companies, which account for roughly one-third of the market capitalization, saw earnings growth of 22% in 2025, while the remaining 493 stocks also achieved 9% earnings growth.
In the growth of profits, 57% is attributed to an increase in sales (up 7%), and 43% is attributed to an improvement in profit margins (up 5.3%). A significant portion of the improvement in profit margins may be due to technical efficiency; however, it is difficult to conclude definitively due to data limitations.
In any case, the improvement in profits is mainly due to the "economic cake" growing larger, with capitalists capturing most of the gains, while workers receive a relatively smaller share. Monitoring profit margins will be very important in the future, as the market currently expects this trend to continue, while left-wing political forces are trying to reclaim a larger share.
3. Valuation and Future Expectations
Although the past is known and the future is uncertain, if we understand causality, the current situation can help us anticipate the future. Currently, the price-to-earnings (P/E) ratio is high and credit spreads are extremely low, indicating that valuations are stretched. History has shown that this signals lower future stock market returns. Based on current earnings yields and productivity levels, my calculated long-term expected return from stocks is only 4.7% (at a historically low percentile), which is very low compared to a 4.9% bond yield. As a result, the equity risk premium is currently extremely low.
This means that very little return can be extracted from risk premiums, credit spreads, and liquidity premiums. If currency depreciation leads to increased supply and demand pressures, causing interest rates to rise, it would have a significant negative impact on credit and equity markets.
The Federal Reserve's policy and productivity growth are the two major uncertainties.The newly appointed Federal Reserve Chair and the committee appear inclined to keep both nominal and real interest rates low, which will support prices and inflate asset bubbles. Productivity will rise in 2026, but it remains uncertain how much of this will translate into profits rather than being offset by tax increases or wage expenditures (a classic left-right issue).
In 2025, the Federal Reserve's rate cuts and accommodative credit conditions reduced discount rates, supporting assets such as stocks and gold. Now, these markets are no longer cheap. Notably, these reflationary measures have not benefited illiquid markets such as venture capital (VC), private equity (PE), and real estate. If these entities are forced to refinance their debt at higher interest rates, liquidity pressures could cause these assets to decline sharply relative to more liquid assets.
4. Transformation of the Political Order
In 2025, politics played a central role in driving the market:
Trump's domestic policy: A leveraged bet on revitalizing American manufacturing and AI technology to rejuvenate capitalism.
Foreign Policy: Scared off some foreign investors; concerns over sanctions and conflicts support investment diversification and gold purchases.
Wealth Gap: The top 10% of capitalists own more stocks and experience faster income growth; they do not view inflation as a problem, while the bottom 60% of the population feel overwhelmed by it.
"The issue of 'currency value/purchasing power' will become the top political topic next year."This could lead to the Republicans losing the House of Representatives and trigger chaos in 2027. On January 1st, Zohran Mamdani, Bernie Sanders, and AOC united under the banner of "Democratic Socialism," signaling a coming battle over wealth and money.
5. Global Order and Technology
The global order has clearly shifted from multilateralism to unilateralism (might makes right) by 2025. This has led to increased military spending by countries, rising debt, and intensified protectionism and de-globalization. Demand for gold has strengthened, while demand for U.S. debt and dollar-denominated assets has declined.
Technologically, the current AI wave is in the early stage of a bubble. I will soon release my bubble indicator report.
Summary
In summary, I believe that debt/monetary/markets/economic forces, domestic political forces, geopolitical forces (military spending), natural forces (climate), and new technological forces (AI) will continue to serve as the main drivers in reshaping the global landscape. These forces will largely follow the "long-term cycles" framework outlined in my book.
Regarding portfolio positioning, I don't want to be your financial advisor, but I hope to help you invest more effectively. Most importantly, you should develop the ability to make independent decisions. You can infer my position direction from my logic. If you want to learn how to do better, I recommend the course "Dalio's Market Principles" offered by the Singapore Wealth Management Institute (WMI).