Veteran investor David Roche describes the three factors that will lead to a bear market
2025 will be a bear year for the market, says veteran investor David Roche. The pullback will be fueled by smaller-than-expected interest rate cuts, a slowing U.S. economy and the AI bubble.
“I think a bear market is probably coming in 2025. Now we know what's going to trigger it.” said the Quantum Strategy strategist on CNBC's “Squawk Box Asia.”
Roche expects the Fed to resist cutting interest rates to the market-desired 3.50%. The Fed's average forecast for 2025 is 4.1%, while almost all market participants currently see rates below 4.1% through September 2025, according to CME's FedWatch Tool.
“The second thing is that earnings will be lower than expected because the economy will slow down,” he warned.
The third factor he expects to lead to a bear market is the AI sector.
It has “entered decisively into bubble territory,” from which it will exit over 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 bearish market of minus 20% in 2025, perhaps starting at the end of this year,” he noted, adding that this forecast does not take into account who will win the US presidential election in November.< /p>
The Fed's Role
The Fed's decision to keep interest rates steady at its last meeting was called into question last week when a poorer-than-expected jobs report reignited recession fears, leading to a sharp market sell-off, which was also exacerbated by easing carry trades in gen.
However, markets rebounded sharply, with the S&P 500 ending last week down less than 0.1%.
He expects the Fed to cut interest rates by 25 basis points, however, this will also cause margins to shrink, which will gradually occur through 2025.
“If you want the Fed to cut rates, then the economy has to slow rates, markets jobs need to loosen and margins will come under pressure,” he said.
If these factors spark a bear market, the Fed will have room to deal with it, as Fed officials, consumers and politicians have a very low pain threshold.
“The Fed has a lot of room to cut interest rates if things get worse than expected, and it has said that repeatedly,” he said.
The whether this can decisively change the bear market is uncertain, but it will prevent it from becoming something that will “undermine and destroy the global economy,” he added.
