Dalio: AI is forming a high-risk bubble, but it may not burst until after the Fed tightens policy.

Ray Dalio, founder of Bridgewater Associates, warned on Tuesday that with the ongoing artificial intelligence boom, the US mega-cap tech stocks may be forming a bubble. However, he also said this bubble may not burst unless the Federal Reserve reverses its current loose monetary policy.

Dalio, speaking in a media interview at the Future Investment Initiative conference in Riyadh, Saudi Arabia, said:

There are indeed many signs of a bubble in the market right now. But bubbles do not burst on their own; usually, it takes tightening monetary policy to prick them.

We are more likely to see rate cuts than rate hikes.

Dalio revealed that he has a personal “bubble indicator,” which currently shows a “relatively high” level.

He also pointed out that apart from stocks related to AI, the overall market performance is “relatively weak,” and shows a high degree of concentration. He noted that currently, 80% of the market’s gains are concentrated in large tech stocks.

Dalio said that the current US economy is displaying a “dual-track structure”: On one hand, in certain sectors, weakness is driving interest rates down; on the other hand, bubbles are forming in other sectors.

He noted that because of this divergence, monetary policy cannot accommodate both sides simultaneously, meaning the bubble could continue to expand. Dalio thinks the current situation may resemble the internet bubble era of 1998-1999 or even the market conditions of 1927-1928.

Whether it’s a bubble or when the bubble will burst, we may not be able to predict accurately. But one thing is certain—risk is accumulating.

Dalio’s views echo those of a growing number of prominent market figures, all of whom have warned of a potential bubble driven by AI investments.

Cathie Wood, known as the “Queen of ARK,” recently warned that AI faces adjustment risks. Unlike Dalio, she referenced the possibility of rate hikes. She said that as market attention shifts from rate cuts to rate hikes, the market will face a “chilling” adjustment, and AI valuations will undergo a “reality check.” But she denied the existence of an AI bubble at present, arguing that the world is at the start of an AI technological revolution, and the long-term valuations of big tech companies are reasonable.

The Federal Reserve is expected to make its second rate cut of the year this Wednesday. Many investors expect the Fed to cut rates once more at its last meeting in December.

This week, all three major U.S. stock indices reached new all-time closing highs, driven by tech stocks, and investors anticipate more AI-related positive news in the financial reports from several tech giants to be released this week.

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