Veteran fund manager sends urgent 9-word message on stocks

The stock market has had a rally for the ages since President Donald Trump backed off some tariffs in early April, clearing the way for trade negotiations with major trading partners.

The S&P 500 marched over 25% higher since hitting a tariff-fueled low on April 8; however, cracks in the U.S. economy are forming even as President Trump's tariff pause has expired, unleashing a new wave of inflation-unfriendly import taxes.

💵💰Don't miss the move: Subscribe to TheStreet's free daily newsletter💰💵

Weakening employment data and arguably sticky inflation isn't a great recipe for stock market gains, and it doesn't help that August is historically a tricky month for markets.

The dynamic has increased investor anxiety, causing a sharp and fast 3% dip late last week. The potential for additional losses has Doug Kass's attention.

Kass is a veteran hedge fund manager with 50 years of experience, including a stint as research director for Leon Cooperman's Omega Advisors. On August 5, he sent a blunt message to investors that's likely to turn some heads.

Hedge fund manager Doug Kass thinks the stock market could suffer a selloff.

Image source: TheStreet

Doug Kass sounds the alarm on stocks

The stock market's gravity-defying gains have rewarded many investors who took advantage of stocks becoming deeply oversold this spring, including Kass. A self-described contrarian with a calculator, he correctly called the selloff overdone in early April before its big move higher.

Nowadays, he's less impressed, saying that the downside risk dwarfs the upside reward, particularly given what he sees as lackluster earnings outside of high-tech.

“Non tech Q2 earnings were poor — as was forward guidance,” wrote Kass on X. “The rate of growth in economy and corporate profits (ex AI) are rolling over. Market participants are worshipping at the altar of price momentum, speculating in meme stocks and riding the wave of large-cap tech equities.”

Just as Kass was bullish on stocks in April when everyone else was bearish, now he's turned bearish when everyone is seemingly bullish.

According to Bank of America, “all major client groups bought equities last week, led by institutions,” resulting in the first stock market inflows in six weeks.

Fund manager buys and sells

“Bull Markets Die Hard, so I don't anticipate a straight-down correction,” wrote Kass in a pre-market post on TheStreet Pro on August 4. “Rather, I am expecting a jagged move lower in the weeks and months ahead. I will be reshorting strength. Friday was likely the first shot across the bow.”

Kass hits the sell button, shorts Nvidia, Palantir, Tesla

And strength is what Kass got.

After the 3% dip in the S&P 500 and Nasdaq caused by worrisome inflation and jobs data last week, the indexes rallied on August 4, adding 1.5% and 1.9%, respectively.

The bounce gave Kass the “reshorting” opportunity he mentioned.

As a result, he delivered an urgent message, saying he is “back to my largest net short exposure since January.”

Kass is picking and choosing, and while net short, he still owns stocks, suggesting his shorting stocks is simply managing risk to control his downside if stocks do roll over.

Among the stocks he's shorting are technology bellwethers he believes have run too fast, too far, and thus, might be due for a short-term retreat, including Nvidia, Palantir, and Tesla.

“The investing world almost universally believes it has discovered a new god in artificial intelligence and machine learning,” said Kass. “AI infrastructure CAPEX is already 20% higher as a % of GDP than what was spent on telecom and internet infrastructure at the peak of the dot com boom.”

Kass doesn't think that's sustainable, leading him to take “trading short rentals” on Nvidia (NVDA) and Palantir.

Nvidia, the AI-chip Goliath, is up 70% in the past 12 months, including 57% in the past three months. The company's shares have recently moved higher on optimism over rising capital expenditure budgets at major hyperscalers, including Microsoft and Meta Platforms.

Meanwhile, Palantir's (PLTR) shares have skyrocketed on optimism surrounding its AI software platform, gaining 128% in the past year, and 58% in the past three months, including a sharp post-earnings rally this week.

He is also short Tesla, which has been mired in a sales slump since CEO Elon Musk supported President Trump's reelection bid and took a role in the administration earlier this year at the newly created Department of Government Efficiency.

Musk has since stepped down from that role, but Tesla's sales haven't recovered yet. In Q2, Tesla's revenue fell 12% year over year to $22.5 billion.

“Current valuations are a poor launching pad for future investment returns,” said Kass.

Todd Campbell is long Nvidia, Palantir, and Tesla shares.