Original author: Ray Dalio

Original translation: Deep Tide TechFlow

As a systematic global macro investor, as we approach the end of 2025, I can't help but reflect on the mechanisms of the market this year. Today's reflection revolves around this topic.

Despite the indisputable facts and return data, my view of the market differs from that of most people. Most believe that U.S. stocks, especially those related to artificial intelligence, are the best investments of 2025 and the biggest investment story of the year.

However, it is undeniable that the largest returns this year (and thus the biggest story) actually came from two main sources:

1) Changes in currency value (especially the U.S. dollar, other fiat currencies, and gold);

2) The performance of U.S. stocks significantly lagged behind non-U.S. stock markets and gold (with gold being the best-performing major market).

This phenomenon is primarily due to fiscal and monetary stimulus policies, improvements in productivity, and a significant shift in asset allocation away from the U.S. market.

In this review, I will analyze the dynamic relationships between currency, debt, markets, and the economy from a more macro perspective over the past year, and briefly discuss how the four major forces of politics, geopolitics, natural events, and technology have influenced the global macro landscape in the context of the "Big Cycle."

First, let's talk about changes in currency value: In 2025, the U.S. dollar fell 0.3% against the yen, 4% against the 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 stories and fluctuations this year stem from the weakest fiat currencies depreciating the most, while the strongest "hard currencies" performed the best. The best-performing major investment asset in 2025 was gold, with a dollar-denominated return of 65%, which is 47% higher than the S&P 500 index's dollar return of 18%.

In other words, from the perspective of gold, the S&P 500 index actually fell by 28%. Let's remember some important principles related to this:

1. When a country's currency depreciates, asset prices 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 for U.S. dollar investors is 18%, for yen investors is 17%, for yuan investors is 13%, for euro investors is only 4%, for Swiss franc investors is only 3%, while for gold investors, it is -28%.

2. Changes in currency have a significant impact on wealth transfer and economic operation.

When a country's currency depreciates, it reduces the country's wealth and purchasing power, making domestic goods and services cheaper in foreign currencies while making foreign goods and services more expensive in the domestic currency.

These changes affect inflation rates and who buys goods and services from whom, but this impact usually has a certain lag.

3. Whether to hedge against exchange rate risk is crucial.

If you have no foreign exchange positions and do not want to bear exchange rate risk, what should you do?

You should always hedge to the currency combination with the least risk. If you believe you can make more accurate judgments, you can make tactical adjustments based on that.

However, I will not elaborate on my specific methods here.

4. As for bonds (i.e., debt assets), since bonds are essentially a promise to deliver currency, their real value declines when currency depreciates, even if nominal prices may rise.

In 2025, the return on U.S. 10-year Treasury bonds was 9% when measured in dollars (about half from yield and half from price growth), 9% when measured in yen, 5% when measured in yuan, but -4% when measured in euros and Swiss francs, and -34% when measured in gold.

Cash investment performance was even worse than bonds. This also explains why foreign investors do not favor U.S. bonds and cash (unless they hedge against exchange rates).

Although the current supply-demand imbalance in the bond market has not yet become a serious issue, nearly $10 trillion in debt will need to be refinanced in the future. Meanwhile, the Federal Reserve seems inclined to ease policies to lower real interest rates.

For these reasons, the attractiveness of debt assets is low, especially long-term bonds, and a further steepening of the yield curve seems possible. However, I am skeptical about whether the Federal Reserve's easing policies will be implemented as significantly as currently priced.

Regarding the significant underperformance of U.S. stocks compared to non-U.S. stocks and gold (the best-performing major market in 2025), as mentioned earlier, although U.S. stocks measured in dollars performed strongly, their performance was much weaker when measured in strong currencies and significantly lagged behind other countries' stock markets.

Clearly, investors prefer non-U.S. stocks over U.S. stocks; similarly, they are more inclined to invest in non-U.S. bonds rather than U.S. bonds or dollar cash.

Specifically, European stock markets outperformed U.S. stock markets by 23%, Chinese stock markets by 21%, UK stock markets by 19%, and Japanese stock markets by 10%. Overall, emerging market stock markets performed even better, with a return of 34%, while emerging market dollar debt had a return of 14%, and the overall return of emerging market local currency debt measured in dollars was 18%.

In other words, the flow of funds, asset values, and the transfer of wealth have undergone a significant shift from the 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 due to robust earnings growth and expansion of price-to-earnings (P/E) ratios. Specifically, earnings growth measured in dollars reached 12%, P/E ratios increased by about 5%, and the dividend yield was approximately 1%, resulting in a total return of about 18% for the S&P 500 index.

The "Magnificent 7" stocks in the S&P 500 accounted for one-third of the total market capitalization, with a 2025 earnings growth rate of 22%. Contrary to popular belief, the other 493 stocks in the S&P 500 also achieved 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. Of this, sales growth contributed 57% to earnings growth, while the improvement in profit margins contributed 43%. Some of the improvement in profit margins seems related to enhanced technological efficiency, but there is currently no data to fully confirm this.

Regardless, the improvement in earnings is mainly attributed to the growth of the overall economy (sales), with businesses (and thus capitalists) capturing most of the profits, while workers receive relatively less.

Monitoring the distribution of profit margin growth in the future is crucial, as the market currently expects significant profit margin growth, while political left forces are attempting to secure a larger share of the economic "pie."

While it is easier to predict the past than the future, if we can understand the most important causal relationships, some current information can help us better foresee the future.

For example, we know that current P/E multiples are high, credit spreads are low, and valuations appear tight.

Historically, this often signals lower future stock returns. Based on my calculations of expected returns derived from stock and bond yields, normal productivity growth, and the resulting profit growth, the expected long-term return on stocks is about 4.7% (below the historical 10th percentile), which is low compared to the current bond return of about 4.9%, indicating a low risk premium for stocks.

Additionally, in 2025, credit spreads narrowed to extremely low levels, which is favorable for low-credit assets and stock assets, but also means these spreads are more likely to rise rather than continue to decline, which is negative for these assets.

Overall, the return potential for stock risk premiums, credit spreads, and liquidity premiums is now minimal. In other words, if interest rates rise—which is possible, as the decline in currency value leads to increased supply-demand pressure (i.e., increased debt supply and deteriorating demand)—this will have a huge negative impact on the credit and stock markets, all else being equal.

In the future, the Federal Reserve's policies and productivity growth are two key uncertainties. Currently, the new Federal Reserve Chair and the Federal Open Market Committee (FOMC) seem inclined to lower nominal and real interest rates, which will support asset prices and may create bubbles.

As for productivity growth, there may be improvements in 2026, but two questions remain uncertain: a) How much will productivity improve? b) How much of this growth will translate into corporate profits, stock prices, and capitalist earnings, and how much will flow to workers and society through wage adjustments and taxes (this is a classic political left-right divide issue).

Consistent with the operational laws 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 risk premiums. These changes collectively drove the market performance mentioned earlier. These policies supported asset prices that performed well during economic re-inflation periods, especially long-duration assets like stocks and gold. Today, these markets are no longer cheap.

It is worth noting that these re-inflation measures have not significantly helped illiquid markets such as venture capital (VC), private equity (PE), and real estate. These markets are facing certain challenges. If one believes in the book valuations of venture capital and private equity (though most do not), the liquidity premium is now very low; clearly, as the debt these entities borrow needs to be refinanced at higher rates, along with increasing liquidity pressures, the liquidity premium is likely to rise significantly, leading to declines in illiquid investments relative to liquid investments.

In short, due to large-scale fiscal and monetary re-inflation policies, the dollar-denominated prices of almost all assets have risen significantly, but currently, the valuations of these assets have become relatively expensive.

When observing market changes, one cannot ignore the changes in political order, especially in 2025. Markets and economies influence politics, and politics, in turn, affects markets and economies. Therefore, politics plays an important role in driving markets and economies. Specifically, in the context of the U.S. and globally:

a) The domestic economic policies of the Trump administration essentially leveraged a bet on capitalist forces, aiming to revitalize U.S. manufacturing and promote the development of U.S. artificial intelligence technology, which significantly impacted the aforementioned market trends;

b) Its foreign policy raised concerns and hesitations among some foreign investors, as fears of sanctions and conflicts intensified, leading investors to prefer portfolio diversification and gold purchases, which is also reflected in the market;

c) Its policies exacerbated wealth and income disparities, as the "wealthy class" (i.e., the top 10% of capitalists) holds more stock wealth, and their income growth is also more significant.

Due to the impact of the above c), the top 10% of capitalists do not perceive inflation as a problem, while the majority (i.e., the bottom 60% of the population) feel overwhelmed by inflation issues. The issue of currency value (i.e., affordability) may become the primary political topic next year, which could lead to the Republican Party losing seats in the House of Representatives in the midterm elections and lay the groundwork for chaos in 2027, while also signaling that 2028 will be a politically charged election filled with left-right confrontations.

Specifically, 2025 is the first year of Trump's four-year term, during which he simultaneously controlled both the House and Senate. Traditionally, this is usually the best time for a president to push their policies.

Therefore, we have seen the Trump administration's radical policies betting heavily on capitalism: including significant stimulative fiscal policies, reducing regulations to increase the liquidity of funds and capital, lowering production thresholds, raising tariffs to protect domestic producers and increase tax revenues, and providing proactive support for production in key industries.

Behind these initiatives is a shift from free-market capitalism to government-led capitalism under Trump's leadership. This policy shift reflects the government's intention to reshape the economic landscape through more direct intervention.

Due to the way the U.S. democratic system operates, President Trump has a relatively unobstructed two-year governing period in 2025, but this advantage may be significantly weakened in the 2026 midterm elections and even completely reversed in the 2028 presidential election. He may feel that he does not have enough time to accomplish what he believes must be done.

Nowadays, it has become rare for a political party to hold power for an extended period, as parties find it difficult to fulfill their promises and meet voters' expectations in economic and social aspects. In fact, when those in power fail to meet voters' expectations within a limited term, the feasibility of democratic decision-making is also called into question. In developed countries, populist politicians from both the left and right propose extreme policies in an attempt to achieve radical improvements, but often fail to deliver on their promises and are ultimately abandoned by voters. This frequent extreme fluctuation and change of power lead to social instability, similar to past situations in underdeveloped countries.

Regardless, 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 1, Zohran Mamdani, Bernie Sanders, and Alexandria Ocasio-Cortez united at Mamdani's inauguration to support the "democratic socialism" movement against billionaires. This struggle over wealth and money is likely to have profound implications for the market and the economy.

In 2025, there were significant changes in the global order and geopolitical landscape. The world shifted from multilateralism (operating under rules overseen by multilateral organizations) to unilateralism (a power-dominated approach where countries operate based on their own interests).

This trend increases the threat of conflict and leads most countries to increase military spending and borrow to support these expenditures. Additionally, this shift has driven the use of economic sanctions and threats, enhanced protectionism, intensified de-globalization, and increased investment and business transactions.

At the same time, the U.S. attracted more foreign capital commitments for investment, but it also led to a decrease in foreign demand for U.S. debt, the dollar, and other assets, further strengthening the market's demand for gold.

Regarding natural events, the process of climate change continued to advance in 2025. However, the Trump administration politically chose to pivot by increasing spending and encouraging energy production in an attempt to minimize the impact of climate issues.

In the field of technology, the rise of artificial intelligence (AI) has undoubtedly had a huge impact on everything. The current AI boom is in the early stages of a bubble. I will soon share my analysis of bubble indicators, so I will not delve into this here.

In contemplating these complex issues, I find it invaluable to understand historical patterns and the causal relationships behind them, to develop well-backtested and systematic strategic plans, and to leverage AI and high-quality data. This is precisely how I make investment decisions and the experience I hope to impart to others.

Overall, I believe that the dynamic forces of debt/currency/market/economy, domestic political forces, geopolitical forces (such as increased military spending and the borrowing to finance it), natural forces (climate change), and the power of new technologies (such as the costs and benefits of artificial intelligence) will continue to be the main driving forces shaping the global landscape. These forces will largely follow the big cycle template I outlined in my book "How Countries Go Broke: The Big Cycle."

Due to the length of this piece, I will not go into further detail here. If you have read my book, you should understand my views on the evolution of the big cycle. If you want to learn more but have not yet read it, I recommend you do so as soon as possible. It will help you better understand future market and economic trends.

Regarding portfolio allocation, while I do not wish to be your investment advisor (that is, I do not want to directly tell you what positions to hold and then have you simply follow my advice), I do hope to help you invest better. While I believe you can infer the types of investments I tend to favor or disfavor, what is most important for you is to have the ability to make independent investment decisions. Whether it is your own judgment on which markets will perform better or worse, building an excellent strategic asset allocation portfolio and sticking to it, or selecting investment managers who can deliver good returns for you, these are key skills you need to master.

If you would like advice on how to do these things to help you succeed in investing, I recommend you participate in the Dalio Market Principles course offered by the Wealth Management Institute of Singapore.

Note: Due to the fourth quarter financial reports not yet being released, the relevant data is estimated.

Note: When these factors decline, they will exert upward pressure on stock prices.

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