Dalio's Year-End Review: Currency, US Stocks, and Global Wealth Redistribution

Original Title: 2025

Original Author: Ray Dalio, Founder of Bridgewater Associates

Original Translation: Bitpush News

As a systemic global macro investor, as we bid farewell to 2025, I naturally reflect on the intrinsic workings of the events that have transpired, particularly in terms of market performance. That is the subject of today's reflection.

While the facts and returns are undeniable, my perspective on the issue is different from most.

Despite the fact that the US stock market, particularly US AI stocks, is widely considered the best investment of 2025 and the core story of the year, the irrefutable fact is that the most substantial returns (and the real headline story) came from:

(1) Currency value movements (most notably the US Dollar, other fiat currencies, and gold)

(2) US stocks significantly underperforming non-US stock markets and gold (gold being the best-performing major market).

This was primarily driven by fiscal and monetary stimulus, productivity improvements, and a large-scale shift in asset allocation away from the US markets.

In these reflections, I take a step back to examine how last year's currency/debt/market/economic dynamics operated and briefly touch on the other four major drivers—politics, geopolitics, natural behavior, and technology—and how they are impacting the global macro picture within the evolving "Big Cycle" backdrop.

1. Currency Value Movements

Regarding Currency Value: 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 being the second-largest reserve currency and the only major non-credit currency).

As a result, all fiat currencies depreciated. The biggest story and market swings of the year came from the weakest fiat currencies experiencing the largest declines, while the strongest/hardest currencies experienced the biggest gains. The most outstanding major investment of the year was, therefore, being long in gold (with a USD return of 65%), outperforming the S&P 500 Index (with a USD return of 18%) by as much as 47 percentage points. In other words, measured in gold currency terms, the S&P index actually experienced a 28% decline.

Let us remember some key principles relevant to the current state:

When a domestic currency depreciates, it makes things priced in that currency appear to rise. In other words, viewing investment returns through the lens of a weak currency can make them seem stronger than they actually are. In this scenario, the S&P Index had an 18% return for a USD investor, a 17% return for a JPY investor, a 13% return for a CNY investor, but only a 4% return for a EUR investor, and a 3% return for a CHF investor. Meanwhile, for a gold-standard investor, the return was -28%.

Currency movements are crucial for wealth transfer and economic trends. When a currency depreciates, it erodes an individual's wealth and purchasing power, making their goods and services cheaper in other currencies but more expensive in their own. This process affects inflation rates and trade relationships, although with a lag.

Whether you have engaged in Currency Hedging is critical. If you have not and do not want to express a view on currency, what should you do? You should always hedge to your least risky currency mix and tactically adjust from there when you believe you can do well. I'll explain later how I do this.

About bonds (i.e., debt assets): Because bonds are a promise to deliver currency, when the currency's value drops, the real value of the bond decreases even if the nominal price rises. Last year, the 10-year US bond had a USD-denominated return of 9% (roughly half from yield and half from price), a JPY-denominated return of 9%, a CNY-denominated return of 5%, but EUR and CHF-denominated returns were both -4%, and the gold-denominated return was -34%—with cash being an even worse investment.

You can understand why foreign investors do not like USD bonds and cash (unless hedged).

Thus far, the bond supply-demand imbalance is not a severe issue, but there will be a large amount of debt (nearly $10 trillion) needing to be rolled over in the future. Meanwhile, the Fed seems inclined to cut rates to depress real rates. Therefore, debt assets lack allure, especially on the long end of the curve, and a steeper yield curve seems inevitable, though I doubt the extent of Fed accommodation is as much as priced in currently.

2. US Stocks Significantly Underperform Non-US Stocks and Gold

As previously mentioned, while US stocks perform strongly when priced in USD, they lag significantly in a strong currency and notably trail stocks in other countries. Evidently, investors prefer holding non-US stocks, bonds, and assets over US ones.

Specifically, European stocks outperformed US stocks by 23%, Chinese stocks by 21%, UK stocks by 19%, and Japanese stocks by 10%. Emerging market stocks performed even better, with a return of 34%, Emerging Market USD bonds returning 14%, and Emerging Market Local Currency Bonds (USD terms) providing an overall return of 18%. In other words, wealth is undergoing a significant shift and value transfer from the US outward, which could lead to more rebalancing and diversified allocations.

Regarding last year's US stocks, the strong results were attributed to earnings growth and Price/Earnings (P/E) expansion.

Specifically, earnings grew by 12% in USD terms, P/E expanded by around 5%, plus about 1% dividend yield, leading to a total S&P return of around 18%. The "Tech Seven Giants," representing about one-third of the market cap, saw earnings growth of 22% in 2025, while the remaining 493 stocks also achieved an earnings growth of 9%.

Within earnings growth, 57% was attributed to revenue growth (increasing by 7%) and 43% to margin improvement (growing by 5.3%). Much of the margin improvement may be due to technological efficiency, but this is still inconclusive due to data limitations.

Nevertheless, earnings improvement is primarily due to the "economic pie" getting bigger, with capitalists reaping most of the benefits, and workers sharing relatively less. Monitoring profit margins in the future is crucial, as the market currently expects this growth to continue, while left-wing political forces are attempting to reclaim a greater share.

3. Valuation and Future Expectations

Although the past is known and the future is uncertain, understanding causality can help us anticipate the future. Currently, with high P/E ratios and extremely low credit spreads, valuations appear stretched. History has shown that this portends lower future stock market returns. Based on current yield levels and productivity, my long-term stock return expectation is only 4.7% (at a historically low percentile), which is very low compared to a 4.9% bond yield, resulting in an extremely low stock risk premium.

This implies that there isn't much more return to squeeze out from risk premiums, credit spreads, and liquidity premiums. If currency devaluation leads to increased supply-demand pressures and subsequently rising rates, this will have significant negative effects on credit and equity markets.

The two major uncertainties are the Fed's policy and productivity growth. The new Fed Chair and committee seem inclined to keep nominal and real rates low, which will support prices and inflate bubbles. Productivity is expected to rise in 2026, but it's uncertain how much of this will translate into profits rather than being used for taxation or wage expenses (a classic left-right issue).

In 2025, the Fed's rate cuts and loose credit reduced the discount rate, supporting assets such as stocks and gold. These markets are no longer cheap. It is worth noting that these reflation measures did not benefit illiquid markets such as Venture Capital (VC), Private Equity (PE), and real estate. If the debt of these entities is forced to finance at higher rates, liquidity pressure will cause a significant drop in these assets relative to liquid assets.

4. Political Order Revolution

In 2025, politics played a core role in driving the markets:

Trump Administration Domestic Policy: A leveraged bet on capitalism revitalizing American manufacturing and AI technology.

Foreign Policy: Scared off some foreign investors, concerns about sanctions and conflicts supported investment diversification and gold purchases.

Wealth Disparity: The top 10% of capitalists own more stocks and experience faster income growth; they do not see inflation as an issue, while the bottom 60% of the population feels overwhelmed by it.

The "Currency Value/Purchasing Power Issue" will be the top political agenda next year, which could lead to the Republican Party losing the House and trigger turmoil in 2027. On January 1, Zohran Mamdani, Bernie Sanders, and AOC converged under the banner of "Democratic Socialism," heralding a battle over wealth and money.

5. Global Order and Technology

In 2025, the global order shifted clearly from multilateralism to unilateralism (power supremacy). This led to increased military spending, expanded debt, intensified protectionism, and deglobalization. Gold demand strengthened, while demand for U.S. debt and dollar assets decreased.

On the technology front, the AI wave is currently in the early stages of a bubble. I will soon be releasing my Bubble Indicator Report.

Summary

In conclusion, I believe that: Debt/Money/Market/Economic Power, Domestic Political Power, Geopolitical Power (Military Spending), Natural Power (Climate), and New Technology Power (AI) will continue to be the primary drivers reshaping the global landscape. These forces will broadly follow the "Long Wave" template outlined in my book.

Regarding portfolio positioning, I do not want to be your investment advisor, but I do want to help you invest better. The most important thing is to have 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 taking the "Dalio Market Principles" course offered by the Wealth Management Institute (WMI) in Singapore.

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