Ray Dalio: AI shows "classic signs" of a bubble

Ray Dalio, who ran Bridgewater Associates for half a century and stepped down from the fund, has long used history as a guide for deploying capital. He now sees echoes of 1929 and 2000 in the current market and is urging caution on AI stocks. His view is that the bubble is already beginning to prick, though he avoids a binary "bubble/not a bubble" judgment. He points to secondary stock issuance, which can dilute investor wealth, and to rising interest rates or wealth taxes as potential triggers for forced selling. While the internet survived the dot-com bust, Dalio suggests an AI downturn could still cause investors pain. He also notes that most AI companies have borrowed heavily to fund capital expenditures, making them vulnerable to rising rates or a sudden drop in infrastructure demand. The exception he highlights is Alphabet, which Berkshire Hathaway has aggressively purchased; Alphabet is on track to spend between $195 billion and $205 billion on AI-driven capital expenditures this year but generated $53 billion in free cash flow over the trailing 12 months, allowing it to maintain stability even if its AI investments fail. With Alphabet trading at a P/E ratio of 17, the potential rewards could outweigh the risks. Dalio's advice is not to abandon AI entirely, but to rotate into higher-quality AI companies or more conservative investments. The stakes hinge on whether the CAPE ratio's extreme reading indeed precedes a deep downturn, as history suggests, or whether AI's growth continues despite the warning signs.