The stock market has been able to shrug off surging interest rates thanks to strong corporate earnings, but its margin for error is shrinking, according to billionaire investor Ray Dalio.

“When we started this cycle, the expected returns of equities were much higher than the expected returns of bonds,” the Bridgewater Associates founder told CNBC on Thursday.

“Because of that change in pricing, that cushion has come down,” he added.

The benchmark 10-year Treasury yield hit 5.36% this week, its highest level since 2002, as investors grappled with persistent inflation, heavy government borrowing, and expectations that the Federal Reserve will keep interest rates higher for longer.

Yet US stocks have remained resilient. The S&P 500 is up more than 13% this year despite pulling back from a recent record high, with enthusiasm over artificial intelligence and robust corporate earnings powering much of the rally.

Higher bond yields make fixed-income investments more attractive relative to equities, leaving stocks with less room to absorb further increases in borrowing costs.

However, strong earnings growth has been enough to offset the drag from higher interest rates for now.

“We’re in the part of the cycle where interest rates can rise without sending the equity market down because there’s enough earnings growth and there’s enough expected return,” Dalio said.

“But when that cushion comes down, then you’re coming later into that cycle.”

The AI buildout is adding to the competition for capital. The enormous capital required to build AI infrastructure is increasing competition for investors’ money at the same time that governments are issuing large amounts of debt, adding to upward pressure on financing costs.

Despite the growing demand for capital, Dalio said financial conditions have not yet tightened enough to meaningfully constrain access to capital.

He pointed to relatively narrow corporate credit spreads — the extra yield investors demand to hold corporate debt over US Treasurys — as evidence that investors are still willing to finance companies at relatively low premiums.

“We know that we haven’t yet put the brakes on,” Dalio said, adding that investors were only beginning to become more selective about where they deploy capital.