Billionaire investor Cliff Asness says stocks are 'woefully' unprepared for a macro shock in the event inflation doesn't come down as expected

• Stocks could face a macro shock if inflation doesn't come down the way markets are expecting, according to Cliff Asness.
• The billionaire investor said stocks were still expensive, and had more downside to come.

Stocks could be shocked by macroeconomic conditions if inflation doesn't come down the way the market is expecting, according to billionaire investor Cliff Asness.

"The fat tail event probably is macroeconomic," the AQR Capital Management co-founder warned in an interview with Bloomberg TV on Thursday. "There's a risk that the macro economy delivers results that markets are still woefully unprepared for."

Similarly, Bank of America has warned that the market could be hit by rebounding inflation and an incoming recession, causing stocks to be flipped upside down.

That comes amid a recent slide in stocks, as investors price in more Fed rate hikes following surprises in price and labor-market data.

Asness also believes the market was in a bubble in late 2020, when ultra-low interest rates and ample liquidity over the past decade brought stocks to dizzying highs.

While that's no longer true of the market, investors are premature to think that just one year of Fed tightening is enough to correct stock prices, he said, warning of more downside to come.

"We're probably still in a bubble in cheap versus expensive. I wouldn't call the overall market a bubble anymore, I would just say it's a very expensive market," he added.

Over the past year, central bankers raised interest rates 450-basis-points to tame inflation – a move that could overtighten the economy into a recession, experts warn. But inflation is still well-above the Fed's 2% target, with central bankers signaling for more tightening to come over the next year.

Markets are currently pricing in a 25-basis-point hike in March and another quarter-point hike in May, which would bring the Fed funds rate target to 5%-5.25%. That would be the highest range interest rates have been since 2007, causing Wall Street analysts to sound the alarms for an impending stock crash.

Other Wall Street commentators have warned of more headwinds in 2023, as firms continue to battle high inflation and tighter financial conditions. Morgan Stanley said stocks were now in the "death zone" and could drop 26% over the next few months.