A stock bubble is at risk of forming if the Fed cuts rates this year, warns 'Big Short' investor Steve Eisman

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A stock bubble is at risk of forming if the Fed cuts rates this year, warns 'Big Short' investor Steve Eisman
Reuters/ Jessica Rinaldi
  • "Big Short" investor Steve Eisman warns of a brewing stock market bubble if the Fed follows through on rate cuts this year.
  • He pointed to dropping unemployment, climbing wages, and robust consumer spending as reasons not to lower rates.
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A stock market bubble will form if the Federal Reserve follows through with rate cuts this year, says "Big Short" investor Steve Eisman.

In response to the Fed's resassurance of lower rates in late March, Eisman — famed for his housing market bets in "The Big Short" series — said the central should keep the rates on hold this year, citing an economy that's humming along just fine.

"My view is the economy is fine. I personally think there should be no Fed cuts this year," he said on CNBC's "Squawk Box" on Tuesday. "My actual fear is that if the Fed were actually to cut rates, the market becomes I guess bubblicious and then we have a real problem. So, you know, things are good. The Fed should do nothing and then wait for the data to get weak."

While the equity market bubble theory lingers, robust earnings growth in mega tech stocks has lifted S&P 500 price targets among Wall Street veterans for 2024. However, the anticipation of rate cuts — a catalyst for market performance, has gained less traction following the latest inflation-signaling PCE and ISM manufacturing data.

That said, the Fed's Chairman Jerome Powell held the rates steadfast in the March FOMC meeting, but reiterated their plan to lower three interest rates this year, but Eisman is against such dovish stance.

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He sees all the data cautioning against rushing into a rate cut by the Fed, adding that unemployment is down; wages are rising, and the only thing to complain about is some things are harder to buy due to inflation.

"There's still a shortage of jobs, so the consumer is fine," he said. "It's a little bear's porridge in a way, so why would you spoil it by lowering rates?"

The top investor also said there's nothing worse than the Fed bringing down the rates first and then hiking them back up when necessary, as history lessons already said so.

"One thing I always think about is, 1999 and 2000 when the market definitely was in a bubble. [But] what killed the bubble was not that it was a bubble, what killed the bubble was that the Fed raised rates a lot and put the economy into a recession," he added.

Eisman concluded: "Maybe the hardest thing to do as a [portfolio manager] is to do nothing, because it's so easy to actually do something. And it's the same thing with the Fed. It's so easy to do something, they could cut whatever they want to cut."

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