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Legendary hedge fund manager Paul Tudor Jones told CNBC that next year could be a tough one for the stock market because of increased equity supply from big tech IPOs coming down the pipe, as well as a potential reckoning from the ballooning U.S. fiscal deficit.
"2027 is going to be really, really challenging for the stock market," Jones told "Squawk Box" on Tuesday. "You've probably got the most negative flow picture for the U.S. stock market that we've had, say, since 2002."
The founder and chief investment officer of Tudor Investment said that corporate buybacks, along with mergers and acquisitions, have been a tailwind for the stock market for most of this four-year bull market as they decreased the equity supply.
That tide is now turning against the market with major offerings ahead in the AI space from Anthropic and OpenAI, along with one just finished in SpaceX. There will also likely be more secondary offerings from companies in order to raise money for the AI buildout, said Jones. It all adds up to an increased equity supply picture that could weight on prices.
The billionaire hedge fund manager's comments come as investors worry that a bull market now in its fourth year could start to dwindle and run out of steam as concerns grow around mounting inflation, higher bond yields and a more hawkish Federal Reserve.
Jones repeated that the current period in the market is akin to 1999, just about a year before the dot-com bubble burst in 2000. He noted the bifurcation in the current market between those companies benefitting from the AI boom and those that aren't.
Deficit concern
He also added that a ballooning fiscal deficit are among the dangers for the current stock market, for which he thinks there could be a reckoning.
"We're never going to fix these deficits until the market makes us to. It's going to be just like 2008 and TARP [Troubled Asset Relief Program]. So that's the reality. No politician is going to voluntarily raise taxes or cut spending. They're going to be forced to," he said.
"And the only question is, are we now at that tipping point where the market's about to do that? And if you put a gun to my head, I'd say 60-40, we're down that path," he continued.
Oil, which he is long, is another headwind for the market, according to the hedge fund manager. He argued that prices could rally another $20 to $25 after the midterms, a scenario that the stock market will "hate" if it comes to pass.
"I'll be short the whole year. There just — there's little value," Jones said. "You had all this issuance, all these IPOs in '98 and '99, and really 2000, 2001, 2002. Those were the easiest years to be short because you kept having these unlocks that just kept adding supply to the market."