'Big Short' Investor Steve Eisman Warns Stock Bubble Could Form If Fed Cuts Rates This Year

• "Big Short" investor Steve Eisman warns of a brewing stock market bubble if the Fed continues to cut interest rates this year.

• He cited falling unemployment, climbing wages and strong consumer spending as reasons not to cut rates.

• This top investor believes that the dot-com bubble was killed by the Fed's response, not the bubble itself.

'Big Short' investor Steve Eisman says a stock market bubble will form if the Fed continues to cut interest rates this year.

In response to the Fed guaranteeing another rate cut at the end of March, Eisman, who is known for his bets on the housing market in the "Big Short" series, said the Fed should stay the course this year, citing the economy as a good place to be.

"My view is the economy is fine. I personally don't think the Fed should cut rates this year," he said Tuesday on CNBC's "Squawk Box."" What I'm really worried about is that if the Fed does cut rates, the market will get frothy and then we'll have a real problem. So, you know, things are going great right now. The Fed should do nothing and then wait for the data to get weak."

While the stock market bubble theory lingers, strong earnings growth in large tech stocks has boosted Wall Street veterans' 2024 price targets for the S&P 500. However, expectations of rate cuts - a catalyst for market performance - have become less attractive following the release of the latest inflation signals, the PCE and ISM manufacturing data.

Despite this, Fed chief Jerome Powell kept rates unchanged at the March FOMC meeting, but reiterated their plan to cut rates three times this year, a dovish stance that Eisemann opposes.

He thinks all the data are reminding the Fed not to rush to cut rates, adding that unemployment is falling; wages are rising, and the only thing to complain about is that some things are harder to buy because of inflation.

"There is still a shortage of jobs," he said, "so consumers are doing fine." In a way, it's the Cub's porridge, so why ruin it by lowering interest rates?"

The top investor also said that there is nothing worse than the Fed to cut interest rates first, and then raise them if necessary, because the lessons of history have said so.

"One thing I've been thinking about is that in 1999 and 2000 there was definitely a bubble in the market. [But] it wasn't the bubbles that killed the bubbles, what killed the bubbles was the Fed raising interest rates so dramatically that it threw the economy into a recession," he added.

Eisman concludes: "Perhaps the hardest thing to do as a carpet manager is to do nothing, because it is so easy to do something. It's the same with the Fed. It's so easy to do something, they can cut whatever they want.

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