- Third Point's Dan Loeb expects the S&P 500 to lead global markets higher.
- "We believe the US has room to lead versus the rest of the world from here and while we have increased exposure to Europe overall this year … the majority of our portfolio remains in US equities," the funds manager writes in a letter to investors.
Third Point's Dan Loeb, who nearly doubled the return over the last two decades and manages $18 billion, just put out the most bullish note on the stock market we've seen in a long time from a top hedge fund manager.
"We believe the US has room to lead versus the rest of the world from here and while we have increased exposure to Europe overall this year … the majority of our portfolio remains in US equities," Loeb wrote in an investor letter obtained by CNBC. "Supported by strong global GDP growth and the prospect for tax reform, S&P 500 earnings prospects are solid."
Loeb noted that economic growth is improving due to the weak U.S. dollar and looser-than-expected monetary policy from the Federal Reserve. As a result, he is especially optimistic on the domestic stock market.
"We were constructive on markets coming into 2017 based in part on expectations that we would see more favorable conditions for businesses via deregulation and tax reform," he wrote. "Deregulation is occurring quickly and although tax reform remains in the works, we expect that markets will continue to move higher, driven by strong consumer and business confidence combined with synchronized global growth."
Loeb cited the 12 percent earnings growth estimates for the S&P 500 in 2018. He said that even if market profits come in 5 percent below the forecast, 7 percent growth is still reasonable. The manager also said the 17.5 times forward price-to-earnings valuation for market may be above historical averages, but he isn't concerned yet.
"Low interest rates coupled with still solid earnings growth suggest valuations can remain high amid a tame business cycle, absent an exogenous shock," he added.
Loeb's hedge fund Third Point Offshore is up 14.5 percent this year through the end of September compared with the S&P 500's 14.2 percent return in the period, according to the new letter. From inception in December 1996 to September 2017, the fund generated annual returns of 15.8 percent versus the market's 8 percent.
Loeb's letter also revealed a new position in Dover, which caused the shares to pop 5 percent Friday.
Loeb played down the negative impact on markets from potential tax reform legislation.
"While we invest a lot of time and effort in the analysis of policymaking, it doesn't appear for now that any of the incremental changes under consideration in tax cuts or rates — whether or not they come to pass — will materially impact the markets," he wrote.
Third Point, which had $18 billion of assets under management as of late June, declined to comment on the investor letter.
In regard to Loeb's investment strategy, Third Point materials describe its philosophy as "event-driven, value-oriented," with an "emphasis on special situation equities." The firm "seeks to identify situations where we anticipate a catalyst will unlock value."
— With reporting by CNBC's Scott Wapner