Veteran investor David Roche anticipates a bear market in 2025, driven by smaller-than-expected rate cuts, a decelerating U.S. economy, and an artificial intelligence bubble.
“I think [a bear market] is probably coming, but probably in 2025. We now know what will cause it,” Roche, a strategist at Quantum Strategy, told CNBC’s “Squawk Box Asia” on Monday.
Roche predicts the Federal Reserve will resist lowering rates to the market’s desired 3.50%. The Fed’s median forecast for 2025 is 4.1%, while nearly all market participants currently expect rates to be below 4.1% by September 2025, according to the CME FedWatch Tool.
“The second thing is that profits [won’t] fulfill expectations, because the economy is going to be slowing,” Roche warned.
The third factor Roche foresees contributing to a bear market is the AI sector. He believes it has “entered bubble terrain decisively,” which it will exit over the next six months or so, becoming a driver of slower economic growth.
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“I think there is enough in those three factors to cause a bear market of minus 20% in 2025, maybe starting at the end of this year,” he said, adding that his prediction does not account for the outcome of the U.S. Presidential election in November.
Last week, the Fed’s decision to keep interest rates steady was questioned after a poorer-than-expected jobs report stoked recession fears, leading to a steep market sell-off exacerbated by the unwinding of carry trades following Japan’s interest rate hike. However, markets rebounded, with the S&P 500 ending the week down less than 0.1%.
Roche now expects the Fed to proceed with interest rate cuts of 25 basis points, but he believes this will also lead to lower profit margins, occurring progressively over 2025.
“If you want the Fed to reduce interest rates, then the economy has to slow down, labor markets have to slacken off, and margins will come under pressure,” he said.
Should these factors trigger a bear market, Roche believes the Fed will have room to address it, given that Fed officials, consumers, and politicians have a very low pain threshold.
“The likelihood is [that] the Fed has plenty of room to cut rates if things turn out worse than expected, and it has repeatedly said so,” he stated. However, whether this can decisively turn the bear market is uncertain, but it will prevent it from becoming something that would “undermine and destroy the world economy,” he added.
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