These days, David Tepper is perhaps best known as the owner of the NFL’s Carolina Panthers. But before staying in the owner’s apartment, the billionaire was already well known as a hedge fund behemoth.
Tepper founded Appaloosa Management in 1993 after honing his skills as a credit analyst at Goldman book, and is known to be a risk-taker when others are fearful. Famous Appaloosa earn 7 billion dollars by gobbling up bank stocks that were devalued in 2009 after the Great Financial Crisis.
But on Thursday, Tepper – who says he still considers himself “an optimist” – revealed he was betting on the stock market. The hedge funder says central banks will continue to raise interest rates to combat inflation, and that’s bad news for stock prices.
“So I can say I’m short on the stock market,” he said. told CNBC, referring to short selling. “Because I think the up/down trend doesn’t make any sense to me when I have so many central banks telling me what they’re going to do.”
Many central banks around the world have been active interest rate increase in 2022 in hopes of curbing global inflation, which has skyrocketed from 3.2% at the beginning of 2020 to 8.8% today, according to the report. International Monetary Fund.
In the US, the Federal Reserve raised interest rates seven times this year, for a total increase of 4.25%—the highest in a year since 1980.
Tepper said that although Critics’ Chorus argued that central banks should slow down or pause rate hikes, he believes officials will continue to focus on fighting inflation.
“You have to believe them,” he said. “I think they are worried about the inflation rate going to 3.5%, 3.75%, 4%.”
Some top minds on Wall Street have expressed concern that inflation may not fall below the central banks’ 2% target next year. Mohamed El-Erian, president of Queens’ College at the University of Cambridge, said last month that inflation could “stranded” at an uncomfortably high figure because of rising wages, supply chain problems and “a shift in globalization.”
In this environment of rising interest rates, Tepper questions whether the S&P 500 is trading at a reasonable earnings multiple.
An earnings multiple, or price-to-earnings ratio, is a way for investors to price a stock—or in this case an index like the S&P 500—based on a company’s earnings. And because rising interest rates can affect earnings, periods with higher interest rates tend to have lower earnings multiples for stocks.
“Why do we still set these multiples as high as when I had 1%? I have to put a realistic multiple for the market,” Tepper said on Thursday.
Today, the S&P 500 is trading around 17.8 times earnings were at 3,800, but Tepper noted that if that number falls only slightly to 16 times next year, the index could fall to 3,600.
The market will have to decide what the exact earnings multiplier should be for this new economic era, but if history is a guide, the situation could be even worse.
But Tepper pointed out that in 2010, the S&P 500 traded at about 12 times earnings when interest rates close to zero after the Great Financial Crisis of 2008. Therefore, with current interest rates, the current multiplier of the index is likely to fall sharply.
“So that’s the question of the stock market right now. What should be the multiple?” Tepper said.
And with the Federal Reserve continuing to raise interest rates, stocks also face another risk.
“Surname [the Federal Reserve] Can’t say for sure, but maybe there’s going to be a mini-recession,” Tepper said.
Our new Weekly Impact Report looks at how ESG news and trends are shaping the roles and responsibilities of today’s executives. Sign up here.