Stocks may be at risk as the Fed's rate hikes and bond disposals squeeze valuations, hedge-fund billionaire David Tepper says

• David Tepper expects stock valuations to fall due to interest rates and quantitative tightening.
• The Appaloosa boss says that financial conditions have worsened so valuations must drop too.

Investors should expect stocks to command lower valuations than in past years, as financial conditions are a lot tighter today, David Tepper says.

"It's not that complicated right now," the billionaire hedge fund manager told CNBC's Scott Wapner on Friday. "You're just not in QE times anymore. You're in the QT era. It's a higher rate environment."

"It can't be the same multiples as before," he continued. "It's not bad. It's just a different environment."

The Appaloosa Management chief was nodding in part to quantitative easing during the COVID-19 pandemic. The Federal Reserve aggressively bought bonds to boost the US money supply, push down interest rates, and encourage banks to lend more freely to consumers and businesses.

The central bank has shifted to quantitative tightening since inflation surged to a 40-year high last year. It has been shrinking the size of its balance sheet, as it wants to cool the economy and relieve upward pressure on prices.

The Fed has also hiked interest rates from nearly zero to north of 5% over the last 18 months. Higher borrowing costs can curb inflation because they encourage saving over borrowing and spending, and lessen the appeal of stocks by lifting bond yields.

They can also drag down house prices by raising mortgage rates, heap pressure on debt-reliant industries like commercial real estate, and even cause recessions by crushing overall demand in the economy.

Tepper's comments suggest he expects lower stock valuations. A company's stock is typically valued at a multiple to its earnings, to account for the value of its future profits. As a result, stocks can fall if their earnings fall (earnings compression), or if their earnings multiple shrinks (multiple compression.)

The Appaloosa boss appears to expect multiple compression, likely because increases in bond yields have reduced the relative appeal of stocks, and companies' growth prospects have been dimmed by stubborn inflation, higher interest payments, and the prospect of a recession.

Indeed, Tepper revealed to CNBC that he recently parked some cash in a six-month Certificate of Deposit paying 6%. His latest bet underscores the big returns available to investors at virtually no risk thanks to higher rates.

The benchmark S&P 500 has charged higher this year thanks to a handful of Big Tech stocks dubbed the "Magnificent Seven." Several of them are trading at eye-watering multiples, reflecting investors' belief that they'll be big beneficiaries of nascent technologies such as artificial intelligence.

For example, Tesla shares closed at $250 on Friday, or 62 times its earnings per share last year. Similarly, Nvidia stock ended the day at $435, or nearly 250 times its EPS last year.

Tepper's view is that sky-high valuations are bound to retreat in this new era of higher rates and tighter financial conditions. Another famed investor, Warren Buffett, would likely agree.

"Interest rates are to asset prices like gravity is to the apple," Buffett said in 2013. "The value of every business, the value of a farm, the value of an apartment, the value of any economic asset is 100% sensitive to interest rates," he said in 1994.