Original Author:Ray Dalio is an American billionaire investor, businessman, and economist. He
Original translation: Deep Tide TechFlow
As a systematic global macro investor, as the end of 2025 approaches, I can't help but reflect on how the markets have functioned this year. Today's reflection is centered precisely on this topic.
Although the facts and return data are indisputable, my view of the market differs from that of most people. Most believe that U.S. stocks, especially those related to artificial intelligence in the U.S., are the best investments in 2025 and the biggest investment story of the year.
However, it cannot be denied that the biggest returns (and therefore the biggest story) this year have actually come from the following two aspects:
1) Changes in the value of currencies (especially the U.S. dollar, other legal tender, and gold);
2) U.S. stocks significantly underperformed non-U.S. equities and gold (which was the best-performing major market).
This phenomenon is mainly attributed to fiscal and monetary stimulus policies, improvements in productivity, and a significant shift in asset allocation away from U.S. markets.
In this review, I will analyze the dynamic relationships among money, debt, markets, and the economy from a broader perspective over the past year. I will also briefly explore how the four major forces—politics, geopolitics, natural events, and technology—have influenced the global macroeconomic landscape within the context of the "Big Cycle" evolution.
First, let's talk about changes in the value of money:In 2025, the U.S. dollar fell 0.3% against the Japanese yen, 4% against the Chinese yuan, 12% against the euro, 13% against the Swiss franc, and 39% against gold (as the second-largest reserve currency and the only major non-fiat currency).
In other words, all fiat currencies are depreciating, and the biggest market story and the most significant market volatility this year came from the weakest fiat currencies depreciating the most, while the strongest "hard currencies" performed best. The top major investment asset in 2025 was gold, which delivered a 65% return in U.S. dollar terms, outperforming the S&P 500's dollar return of 18% by 47%.
In other words, from the perspective of gold, the S&P 500 index actually fell by 28%. Let's keep in mind some important principles related to this:
1. When a country's currency depreciates, the prices of assets measured in that currency appear to rise. In other words, from the perspective of a weak currency, investment returns seem higher than they actually are.
In this case, the return on the S&P 500 index was 18% for dollar investors, 17% for yen investors, 13% for RMB investors, only 4% for euro investors, just 3% for Swiss franc investors, and -28% for gold investors.
2. Changes in currency have a significant impact on wealth transfer and economic operations.
When a country's currency depreciates, it reduces the country's wealth and purchasing power. It makes the country's goods and services cheaper in terms of foreign currency, while making foreign goods and services more expensive in terms of the domestic currency.
These changes will affect the inflation rate and the patterns of who buys goods and services from whom, but such effects usually occur with a certain lag.
3. Whether to hedge against exchange rate risk is crucial.
What should you do if you have no foreign exchange position and do not want to bear the exchange rate risk?
You should always hedge to the currency combination with the least risk. If you believe you have the ability to make more accurate judgments, you can then make tactical adjustments based on that.
However, I won't go into detailed explanations of my specific methods here.
4. As for bonds (i.e., debt assets), since bonds are essentially promises to deliver money, their real value decreases when the currency depreciates, even though their nominal price may rise.
In 2025, the U.S. 10-year Treasury bond will yield a 9% return in U.S. dollar terms (about half from yield and half from price appreciation), 9% in Japanese yen terms, 5% in Chinese yuan terms, but -4% in euro and Swiss franc terms, and as much as -34% in gold terms.
The investment performance of cash has been even worse than that of bonds. This also explains why foreign investors are not favoring U.S. dollar bonds and cash (unless they have hedged against exchange rate fluctuations).
Although the current imbalance between supply and demand in the bond market has not yet become a serious issue, nearly 10 trillion U.S. dollars of debt will need to be refinanced in the future. At the same time, the Federal Reserve appears inclined to ease policy in order to lower real interest rates.
For these reasons, debt assets are less attractive, particularly long-term bonds, and a further steepening of the yield curve seems likely. However, I remain skeptical about whether the Federal Reserve will implement its accommodative policies as aggressively as currently priced in.
On the topic of U.S. stocks significantly underperforming non-U.S. stocks and gold.(2025's top-performing major market), as previously mentioned, although U.S. stocks performed strongly in dollar terms, their performance was significantly weaker when measured in local currency, and they lagged notably behind stock markets in other countries.
Clearly, investors prefer non-U.S. stocks over U.S. stocks; similarly, they also tend to favor non-U.S. bonds over U.S. bonds or cash in U.S. dollars.
Specifically, European equities outperformed U.S. equities by 23 percent, Chinese equities by 21 percent, U.K. equities by 19 percent, and Japanese equities by 10 percent. Overall, emerging market equities performed even better, delivering a return of 34 percent, while emerging market dollar-denominated debt returned 14 percent, and emerging market local currency debt denominated in U.S. dollars returned 18 percent overall.
In other words, there has been a significant shift in capital flows, asset values, and wealth transfer from U.S. to non-U.S. markets. This trend may lead to more asset rebalancing and diversification.
In 2025, the strong performance of the U.S. stock market was primarily driven by robust earnings growth and an expansion in price-to-earnings (P/E) ratios. Specifically, earnings growth in U.S. dollars reached 12%, P/E ratios increased by approximately 5%, and the dividend yield was about 1%, resulting in a total return of approximately 18% for the S&P 500 index.
The "Magnificent 7" stocks in the S&P 500 account for one-third of the total market capitalization, with their 2025 earnings growth reaching 22%. Contrary to popular belief, the remaining 493 stocks in the S&P 500 also achieved a strong earnings growth of 9%, resulting in an overall earnings growth rate of 12% for the entire S&P 500 index.
This growth was primarily driven by a 7% increase in sales and a 5.3% improvement in profit margins. Specifically, the sales growth contributed 57% of the profit increase, while the improvement in profit margins contributed 43%. Some of the margin improvement appears to be related to enhanced technical efficiency, but there is currently no data that fully confirms this.
In any case, the improvement in profits is mainly attributed to the growth in the total scale of the economy (sales), as well as the fact that businesses (and therefore capitalists) have captured most of the gains, while workers have relatively received fewer benefits.
Monitoring the distribution of profit margin growth will be crucial in the future, as the market currently expects significant increases in profit margins, while political left-wing forces are striving to claim a larger share of the economic "pie."
Although the past is easier to predict than the future, if we can understand the most important causal relationships, some current information can help us better anticipate the future.
For example, we know that the current price-to-earnings multiple is high, credit spreads are low, and valuations appear relatively stretched.
Historically, this often signals lower future stock returns. Based on my calculated expected returns, which consider equity and bond yields, normal productivity growth, and resulting profit growth, the long-term expected return for stocks is approximately 4.7% (below the historical 10th percentile). This level appears relatively low compared to the current bond return of about 4.9%, indicating a lower equity risk premium.
In addition, credit spreads are expected to narrow to very low levels by 2025, which is positive for low-credit-quality and equity assets. However, this also implies that these spreads are more likely to rise rather than continue to decline, which would be negative for these assets.
In general, the return potential from equity risk premiums, credit spreads, and liquidity premiums has become very limited. In other words, if interest rates rise—which is likely, as the decline in the value of money leads to increased supply and demand pressures (i.e., increased debt supply and deteriorating demand)—then, all else being equal, this will have a significant negative impact on credit and equity markets.
In the future, the Federal Reserve's policies and productivity growth will be two key sources of uncertainty. At present, the newly appointed Federal Reserve Chair and the Federal Open Market Committee (FOMC) appear inclined to keep both nominal and real interest rates low, which would support asset prices and potentially lead to the formation of bubbles.
Regarding productivity growth, there may be some improvement by 2026, but two issues remain uncertain: a) how much productivity will increase; and b) how much of this growth will translate into corporate profits, stock prices, and returns for capitalists, and how much will flow to workers and society through wage adjustments and taxation (this is a classic issue dividing political left and right).
Consistent with the operating principles of the economic system, in 2025, the Federal Reserve lowered the discount rate by cutting interest rates and easing credit supply, thereby increasing the present value of future cash flows and reducing the risk premium. These changes collectively contributed to the previously mentioned market performance. These policies supported asset prices that perform well during periods of economic reflation, especially longer-duration assets such as stocks and gold. Today, however, these markets are no longer cheap.
It is worth noting that these reflationary measures are unlikely to provide much support for illiquid markets such as venture capital (VC), private equity (PE), and real estate. These markets are currently facing certain difficulties. If one believes the book valuations of VC and PE investments (although most people do not), liquidity premiums are now extremely low. Clearly, as the debt these entities have taken on needs to be refinanced at higher interest rates and liquidity pressures increase, liquidity premiums are likely to rise significantly, leading to a decline in illiquid investments relative to liquid ones.
In short, due to large-scale fiscal and monetary reflationary policies, the dollar-denominated prices of almost all assets have risen significantly. However, the valuations of these assets have now become relatively expensive.
When observing market changes, it is important not to overlook changes in the political order, especially in 2025. Markets and the economy influence politics, while politics, in turn, can also affect markets and the economy. Therefore, politics plays a significant role in driving markets and the economy. Specifically, in the case of the United States and globally:
a) The domestic economic policies of the Trump administration essentially represented a leveraged bet on capitalist forces, aiming to revitalize U.S. manufacturing and promote the development of American artificial intelligence technology, and these policies had a significant impact on the aforementioned market trends;
b) Its foreign policy has raised concerns and caused hesitation among some foreign investors. Due to heightened worries about sanctions and conflicts, investors are increasingly opting for portfolio diversification and purchasing gold, which is also reflected in the markets;
c) Its policies have exacerbated wealth and income inequality, as the "wealthy class" (i.e., the top 10% of capitalists) holds more stock wealth, and their income growth has also been more significant.
Due to the impact mentioned in point c) above, the top 10% capitalist class does not perceive inflation as a problem, while the majority of people (i.e., the bottom 60%) are heavily burdened by inflation. Issues related to the value of money (i.e., affordability issues) may become the top political concern next year. This could lead to the Republican Party losing seats in the House of Representatives during the midterm elections, set the stage for turmoil in 2027, and signal that the 2028 election will be a highly contentious one between left- and right-wing political forces.
Specifically, 2025 will be the first year of Trump's four-year term, during which he will also control both the House and Senate. By tradition, this is typically the best time for a president to advance his policy agenda.
Therefore, we see the Trump administration's radical policies fully committed to capitalism: including highly stimulative fiscal policies, reducing regulations to enhance the liquidity of money and capital, lowering production barriers, raising tariffs to protect domestic producers and increase tax revenue, and actively supporting production in key industries.
Behind these measures is a shift, under Trump's leadership, from free-market capitalism toward state-directed capitalism. This policy shift reflects the government's attempt to reshape the economic landscape through more direct intervention.
Due to the way the American democratic system operates, President Trump would have a relatively unimpeded two-year period in 2025, but this advantage could be significantly weakened in the 2026 midterm elections and potentially completely reversed in the 2028 presidential election.He might feel that he doesn't have enough time to complete the things he believes must be done.
Nowadays, it has become rare for a political party to maintain long-term governance, as parties often struggle to fulfill their promises and meet voters' economic and social expectations. In fact, when those in power fail to meet public expectations within limited terms, the feasibility of democratic decision-making itself is called into question. In developed countries, populist politicians from the left or right propose radical policies in an attempt to achieve drastic improvements, but they often fail to deliver on their promises and are eventually abandoned by voters. This frequent shift toward radical change and the turnover of power has led to social instability, similar to what was previously observed in less developed countries.
In any case, it is becoming increasingly clear that a large-scale confrontation between the far right, led by President Trump, and the far left is brewing.
On January 1st, Zohran Mamdani, Bernie Sanders, and Alexandria Ocasio-Cortez joined forces at Mamdani's inauguration to support the "democratic socialist" movement against billionaires. This struggle over wealth and money is likely to have a profound impact on markets and the economy.
In 2025, the global order and geopolitical landscape have undergone significant changes. The world has shifted from multilateralism (operating under rules supervised by multilateral organizations) toward unilateralism (a power-driven approach where countries prioritize their own interests).
This trend increases the threat of conflict and has led most countries to raise military spending and borrow to support these expenditures. In addition, this shift has driven the use of economic sanctions and threats, increased protectionism, accelerated de-globalization, and resulted in more investment and business transactions.
At the same time, the United States attracted more foreign capital commitments for investment, but it also led to a reduction in foreign demand for U.S. debt, the dollar, and other assets, while further intensifying market demand for gold.
Regarding natural events, the process of climate change continued to advance in 2025. However, the Trump administration politically chose to shift direction, attempting to minimize the impact of climate issues by increasing spending and encouraging energy production.
In the technology field, the rise of artificial intelligence (AI) has undoubtedly had a significant impact on everything. The current AI boom is in the early stage of a bubble. I will soon share my analysis of the bubble indicators, so I won't go into further details here.
When thinking about these complex issues, I have found that understanding historical patterns and the causal relationships behind them, developing well-backtested and systematic strategic plans, and leveraging artificial intelligence and high-quality data are extremely valuable. This is precisely how I make investment decisions, and it is the experience I hope to share with all of you.
In general, I believe the dynamic forces of debt, money, markets, and the economy, domestic political forces, geopolitical forces (such as increased military spending and the borrowing required to finance it), natural forces (climate change), and the forces of new technologies (such as the costs and benefits of artificial intelligence) will continue to be the main drivers shaping the global landscape. These forces will largely follow the grand cycle template I presented in my work, "How Countries Go Broke: The Big Cycle."
Since this has already become lengthy, I will not go into further details here. If you have read my book, you should understand my views on the evolution of long-term cycles. If you would like to learn more but have not yet read it, I recommend that you do so as soon as possible. This will help you better understand future market and economic trends.
Regarding portfolio configuration, although I don't want to be your investment advisor (in other words, I don't want to directly tell you which positions you should hold and have you simply follow my advice), I do hope to help you invest more effectively. Although I believe you can probably infer my preferences or dislikes for certain types of investments, what matters most for you is the ability to make independent investment decisions. Whether it's your own judgment about which markets will perform better or worse, building an excellent strategic asset allocation and sticking to it, or selecting investment managers who can deliver good returns for you, these are all key skills you need to develop.
If you would like to receive advice on how to do these things well to help you achieve success in your investments, I recommend that you join the program offered by the Wealth Management Institute of Singapore. Dalio's Market Principles refer to the investment philosophy and management concepts proposed by Ray Dalio, the Course.
Note: Since the Q4 financial results have not yet been released, the related data is estimated.
Note: When these factors decline, they can create upward pressure on stock prices.