Ray Dalio says a risky AI market bubble is forming, but may not pop until the Fed tightens

Bridgewater Associates founder Ray Dalio on Tuesday warned that a bubble could be forming around megacap technology in the U.S. amid the artificial intelligence boom, but said that it may not end until the Federal Reserve reverses its current easy policies.

“There’s a lot of bubble stuff going on,” Dalio told CNBC’s Sara Eisen in an exclusive interview from the Future Investment Institute in Riyadh, Saudi Arabia. “But bubbles don’t pop, really, until they are popped by tightness of monetary policy and so on.”

Added Dalio, “We’re going to be more likely to ease rates than to tighten rates.”

The hedge fund titan said he uses a personal “bubble indicator” that’s relatively high right now. Dalio joins a growing chorus of well-known market participants that have cautioned about the potential for a bubble tied to AI spending in recent months.

The Fed is set to cut rates for a second time this year on Wednesday and many investors expect the central bank it will do so again at its final meeting of the year in December.

The billionaire investor also pointed out that outside of AI-linked names, the market as a whole has done “relatively poorly” and there’s a “concentrated environment.” He noted that 80% of gains are concentrated within Big Tech. The three major indexes on Monday rallied to all-time closing highs, led higher by technology stocks with more good AI news expected from a series of Big Tech earnings this week.

Dalio said there’s a “two-part economy,” with the easing of interest rates because of weakening in some places while a bubble develops elsewhere.

He said monetary policy cannot aid both ends of this spectrum given the divergence, making it more likely that the bubble will continue. Dalio said the outcome could be similar to what was seen in 1998 to 1999 or in 1927 and 1928.

“Whether or not it’s a bubble and when that bubble is going to burst, maybe we don’t know exactly,” Dalio said. “But what we can say is there’s a lot of risk.”