2025

2025

Ray Dalio, 2026-02-19

Naturally, as a systematic global macro investor leaving 2025, I reflected on the mechanics of what happened, particularly in the markets. That’s what today’s reflection is about.

Though the facts and returns are indisputable, I see things differently from most others. While most people see US stocks and particularly US AI stocks to be the best investments and hence the biggest investment story of 2025, it is indisputably true that the biggest returns (and hence the biggest story) came from 1) what happened to the value of money (most importantly the dollar, other fiat currencies, and gold) and 2) US stocks significantly underperforming both non-US stock markets and gold (which was the best performing major market) principally as a result of fiscal and monetary stimulations, productivity gains, and big shifts in asset allocations away from US markets. In these reflections, I step back and look at how this money/debt/market/economy dynamic worked last year, and I briefly touch on how the other four big forces—politics, geopolitics, acts of nature, and technology—affected the global macro picture in the context of the evolving Big Cycle.

Regarding 1) what happened to the value of money: the dollar fell by 0.3% against the yen, 4% against the renminbi, 12% against the euro, 13% against the Swiss franc, and 39% against gold (which is the second largest reserve currency and the only major non-fiat currency). So, all fiat currencies fell, and the biggest story and the biggest market moves of the year were the result of the weakest fiat currencies falling the most, while the strongest/hardest currencies strengthened the most. The best major investment of the year was long gold (returning 65% in dollar terms), which outperformed the S&P index (which returned 18% in dollars) by 47%. Or, said differently, the S&P fell by 28% in gold-money terms. Let’s remember some key principles that pertain to what is happening:

When one’s own currency goes down, it makes it look like the things measured in it went up. In other words, looking at the investment returns through the lens of a weak currency makes them look stronger than they really are . In this case, the S&P 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%.

What happens with the currency matters a lot to shifts in wealth and what happens economically. When one’s currency goes down, it reduces one’s wealth and one’s buying power, it makes one’s goods and services cheaper in others’ currencies, and it makes others’ goods and services more expensive in one’s own currency. In these ways, it affects inflation rates and who buys what from whom, though it does so with a lag. Whether or not you are currency hedged matters a lot. What if you don’t have, and don’t want to take, a view on the currency? What should you do? You should always be hedged to your least-risk currency mix and make tactical moves from there if you think you are capable of making them well. I won’t digress now into an explanation of how I do that, though I will later.

As for bonds—i.e., debt assets—because they are promises to deliver money, when the value of money goes down, their real worth is lowered even as their nominal prices rise. Last year, 10-year US Treasury bonds returned 9% (roughly half from yield and half from price) in dollar terms, 9% in yen terms, 5% In renminbi terms, and -4% in euro terms, -4% in Swiss franc terms, and -34% in gold terms—and cash was an even worse investment. You can see why foreign investors didn’t like dollar bonds and cash (unless they were currency hedged). Thus far, the bond supply/demand imbalance has not been a serious problem, but a large amount of debt (nearly $10tn) will need to be rolled going forward. At the same time, it appears likely the Fed will be inclined to ease to push real interest rates down. For these reasons, debt assets look unappealing, especially at the long end of the curve, and a further steepening of the yield curve seems probable, though it seems questionable to me that the Fed’s easing will be as much as is discounted in the current pricing.

Regarding

2) US stocks significantly underperforming non-US stocks and gold (which was the best performing major market), as previously mentioned, while US stocks were strong in dollar terms, they were much less strong in the currencies that were strong, and they significantly underperformed other countries’ equities. Clearly, investors would have much rather been in non-US stocks than in US stocks, just as they would have preferred to be in non-US bonds than in US bonds and US cash. More specifically, European stocks outperformed US stocks by 23%, Chinese stocks outperformed by 21%, UK stocks outperformed by 19%, and Japanese stocks outperformed by 10%. Emerging market stocks as a whole did better, returning 34%, while emerging market dollar debt returned 14% and emerging market local currency debt in dollar terms returned 18% as a whole. In other words, there were big shifts in flows, values, and, in turn, wealth away from the US, and what is happening will probably lead to more rebalancing and diversifying.

As for US stocks last year, the strong results were due to both strong earnings growth and a P/E expansion. More specifically, earnings were up 12% in dollar terms, the P/E rose by about 5%, and the dividend yield was about 1%, so the total return of the S&P was about 18% in dollars. The “Magnificent 7” stocks in the S&P 500, which account for about a third of its market cap, had earnings growth of 22% in 2025, and, contrary to popular thinking, the other 493 stocks in the S&P also had strong earnings growth at 9%, so the whole S&P 500 index had earnings growth of 12%. That happened as a result of sales increasing by 7% and margins increasing by 5.3%, so sales were responsible for 57% of the earnings increase and margin improvements were responsible for 43% of it.* It appears that some significant portion of the margin improvements was due to technology efficiencies, but I can’t see the numbers to tell for sure. In any case the earnings improvements were largely due to the economic pie (i.e., sales) increasing and companies (hence the capitalists who own them) capturing most of the improvement and workers capturing relatively little of it. It will be very important to monitor the margin increases that go to profits going forward because the markets are now discounting that these increases will be large while leftist political forces are trying to capture a greater share of the pie.

While it is easier to know the past than the future, we do know something about the present that can help us better anticipate the future if we understand the most important cause/effect relationships. For example, we know that with PE multiples high and credit spreads low, valuations appear to be stretched. If history is a guide, this 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. Also, credit spreads contracted to very low levels in 2025, which was a positive for lower credit and equity assets, but it leaves these spreads less likely to decline and more likely to rise, which is a negative for these assets. 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.** It also means that if interest rates rise, which is possible as there are growing supply/demand driven pressures (i.e., supply is increasing while the demand picture is worsening) to have happen because the value of money is declining, all else being equal, it will have a large negative effect on the credit and stock markets.

Of course, there are big questions about Fed policy and productivity growth ahead. It appears most likely that the newly appointed Fed chair and the FOMC will be biased to push nominal and real interest rates down, which would be supportive to prices and inflate bubbles. As for productivity growth, it will likely improve in 2026, though a) how much it will improve and b) how much of it will be allowed to flow through to benefit company profits, stock prices, and, in turn, capitalist owners versus how much will go to workers and socialists in the form of comp changes and taxes (which is the classic political right/left question) are uncertain.

Consistent with how the machine works, in 2025 the Fed’s cutting interest rates and easing the availability of credit lowered the discount rate, determining the present value of future cash flows and lowering risk premia, which together contributed to the previously described results. These changes supported the prices of assets that do well in reflations, especially those with long-durations, like equities and gold, so now these markets are no longer cheap. Also, notably, these reflationary moves didn’t help venture capital, private equity, and real estate—i.e., the illiquid markets—very much. Those markets are having problems. If one believes the stated valuations in VC and PE (which most people don’t), liquidity premiums are now very low; I think it’s obvious that they are likely to rise a lot as the debt these entities took on has to be financed at higher interest rates and the pressures to raise liquidity build, which would make illiquid investments fall relative to liquid ones.

In summary, just about everything went up a lot in dollar terms because of the big fiscal and monetary reflationary policies and are now relatively expansive.

One cannot look at the changes in the markets without looking at the changes in the political order, especially in 2025. Because markets and the economy affect politics and politics affect markets and the economy, politics played a big role in driving markets and economies. More specifically in the US and for the world:

a) the Trump administration’s domestic economic policies were and still are a levered bet on the power of capitalism to revitalize American manufacturing and enable American AI technology, which contributed to the market movements I described above,

b) its foreign policy has scared and turned off some foreign investors as fears of sanctions and conflicts supported the sort of portfolio diversification and buying of gold that we saw, and

c) its policies increased wealth and income gaps because the “haves” (those in the top 10%), who are capitalists, have more wealth in stocks and because their income gains were bigger.

As a result of c), those capitalists who are in the top 10% now don’t see inflation as a problem, while the majority (those in the bottom 60%) feel overwhelmed by it. The value of money issue, otherwise known as the affordability issue, will probably be the number one political issue next year, contributing to the Republicans losing the House and a very messy 2027 on the way to a very interesting 2028 election in which the clash between the right and the left is shaping up to be a big one.

More specifically, 2025 was the first year of the Trump four-year term in which he had control of both houses, which is classically the best year for presidents to push through what they want, so we saw his administration’s all-out aggressive bet on capitalism—i.e., the aggressively stimulative fiscal policy, reducing regulations so that money and capital would be more plentiful, making it easier to produce most things, raising tariffs to both protect domestic producers and to bring in tax revenue, providing proactive supports to key industries’ production. Behind these moves, there was a Trump-led shift from free-market capitalism to government-directed capitalism.

Because of how our democracy works, President Trump has a two-year unimpeded mandate that can be weakened greatly in the ‘26 mid-term elections and reversed in the ‘28 elections. He must feel that this doesn’t give him enough time to get done what he believes he needs to get done. Nowadays, it is rare for one party to be able to stay in power for long because it is difficult for them to live up to their promises to satisfy their electorates’ financial and social expectations. In fact, there is reason to question the viability of democratic decision-making when those in office are unable to govern long enough to meet the voters’ expectations. It is becoming a norm in developed countries to see populist politicians from the left or the right who advocate for extreme policies to bring about extreme improvements and then fail to deliver and are thrown out of office. These frequent changes from one extreme to another are destabilizing. It’s like it used to be in underdeveloped countries. In any case, it is increasingly apparent that a big fight is brewing between the hard right, now led by President Trump, and the hard left. On Jan 1, we saw the opposition coalescing as Zohran Mamdani, Bernie Sanders, and Alexandria Ocasio-Cortez united at Mamdani’s inauguration behind the anti-billionaire, “Democratic socialist” movement. This will be a fight over wealth and money that will likely affect the markets and economies.

Regarding how the world order and geopolitics are changing, in 2025 there was a clear shift from multilateralism (in which there is an aspiration to operate by rules overseen by multilateral organizations) to unilateralism (in which power rules and countries operate in their self-interest). That raised and will continue to raise threats of conflict and lead to increased military spending, and borrowing to finance it, in most countries. It also contributed to the increased use of economic threats and sanctions, protectionism, deglobalization, many more investment and business deals, more foreign capital promised to be invested in the United States, strengthening demand for gold, and reduced foreign demand for US debt, dollars, and other assets.

Regarding acts of nature, the progression of climate change continued while there was a politically led Trump shift in spending money and encouraging energy production in an attempt to minimize the issue.

Regarding technology, obviously the AI boom that is now in the early stages of a bubble had a big effect on everything. I will soon send out an explanation of what my bubble indicators are showing, so I won’t get into that subject now.

That’s a lot to think about, and we didn’t cover much about what’s going on outside the US. I have found that having an understanding of the patterns of history and the cause/effect relationships that drove them, having a well back tested and systemized game plan, and using AI and great data is invaluable. That’s how I play the game and what I want to pass along to you.

In summary, this approach has led me to believe that the debt/money/markets/economy force, the domestic political force, the forces of geopolitics (e.g., increased military spending and borrowing to finance it), the force of nature (climate), and the force of new technologies (e.g., the costs and benefits of AI) will continue to be the major drivers shaping the whole picture, and that these forces will broadly track the Big Cycle template I laid out in my books. As I have already gone on for too long, I won’t go deeper into all this now. If you read my book How Countries Go Broke: The Big Cycle , you know what I think about how the cycle will evolve, and if you want to learn more and haven’t read it, I suggest that you do.

As for portfolio positioning, while I don’t want to be your investment advisor (meaning I don’t want to tell you what positions to have and have you simply follow my advice), I do want to help you invest well. Though I think you can surmise the types of positions I like and don’t like, the most important thing for you to have is the ability to make your investment decisions yourself, whether to place your own bets on which markets will do well and poorly, or to build a great strategic asset allocation mix that you stick with, or to pick managers who will invest well for you. If you want my advice about how to do these things well to help you be successful at investing, I recommend the Dalio Market Principles course which is put out by the Wealth Management Institute of Singapore.

* Since we won’t have this info with certainty until Q4 results are reported, these are estimates.

** When these things decline, it exerts upward pressure on stock s.