Federal Reserve Chairman Jerome Powell speaks before the Senate Committee on Banking, Housing and Urban Affairs in Washington, DC, the United States, on Tuesday, July 9, 2024.
Tierney L. Cross Bloomberg | Getty Images
Veteran investor David Roche predicts a bear market in 2025 due to smaller-than-expected interest rate cuts, a slowdown in the U.S. economy and an artificial intelligence bubble.
“I think (a bear market) may be coming, but probably in 2025. We now know what causes a bear market,” strategists at Quantum Strategy told CNBC's “Squawk Box Asia” on Monday.
Roche expects the Fed to resist cutting interest rates to the 3.50% market expectation. Federal Reserve's median forecast 4.1% in 2025, while Almost all market participants Rates are currently expected to be below 4.1% by September 2025, according to the CME FedWatch tool.
“The second thing is that profits are not going to be as expected because the economy is going to slow down,” Roche warned.
The third factor that Roche predicts will lead to a bear market is the field of artificial intelligence.
Roche said it has “decisively entered bubble territory” and will exit in the next six months or so, and will be one of the drivers of slower economic growth.
“I think these three factors are enough to cause a negative 20% bear market in 2025, perhaps starting at the end of this year,” he said, adding that the forecast did not take into account who would win the U.S. presidential election in November.
The Fed's decision to keep interest rates steady at its latest meeting was called into question last week as a weaker-than-expected jobs report stoked fears of a recession, leading to a sharp market sell-off and subsequent unwinding of carry trades in Japan. aggravated the situation.
However, the market recovered significantly, with the S&P 500 ending the week down less than 0.1%.
Now, Roche expects the Fed to continue cutting interest rates by 25 basis points, but this will also lead to lower profit margins, which will gradually happen in 2025.
“If you want the Fed to cut rates, then the economy has to slow interest rates, the labor market has to slow, and margins are going to be under pressure,” he said.
If these factors trigger a bear market, the Fed will have room to respond given the very low pain threshold among Fed officials, consumers and politicians, Roche said.
He said: “If things are worse than expected, the Fed may have enough room to cut interest rates, and the Fed has said so many times.”
Whether this would decisively reverse the bear market was uncertain, but it would prevent it from becoming a situation that “damages and destroys the world economy,” he added.