Michael Nagle | Bloomberg |
Veteran investor David Roche expects a bear market in 2025, which could be caused by smaller-than-expected interest rate cuts, a weakening US economy and an artificial intelligence bubble.
“I find [a bear market] is likely, but probably not until 2025. We now know what the cause will be,” the Quantum Strategy strategist told CNBC's “Squawk Box Asia” on Monday.
Roche believes that the Fed will be reluctant to lower interest rates to the 3.50% desired by the market. The Fed's median forecast for 2025 is 4.1%, while according to the CME FedWatch tool, almost all market participants currently expect interest rates below 4.1% by September 2025.
“Secondly, profits [won’t] expectations because the economy will weaken,” warned Roche.
The third factor that Roche believes will lead to a bear market is the AI sector.
The company has “decisively entered the territory of the bubble” from which it will emerge in the next six months and will be one of the drivers of the slowdown in economic growth, Roche said.
“I think these three factors are enough to trigger a bear market of minus 20 percent in 2025, possibly as early as the end of this year,” he said, adding that his prediction does not take into account who will win the U.S. presidential election in November.
The Fed's decision to leave rates unchanged at its recent meeting was called into question last week when a worse-than-expected jobs report stoked recession fears and led to a massive sell-off in markets, which was exacerbated by the unwinding of carry trades following Japan's rate hike.
However, the markets recovered significantly and the S&P 500 ended last week down less than 0.1 percent.
Roche now expects the Fed to cut its key interest rates by 25 basis points. However, this will also lead to lower profit margins, gradually over the course of 2025.
“If you want the Fed to cut rates, the economy will have to slow rates, labor markets will have to soften and margins will come under pressure,” he said.
If these factors trigger a bear market, Roche says the Fed has room to respond because the pain threshold among Fed officials, consumers and politicians is very low.
“The probability is [that] the Fed has ample room to cut rates if things get worse than expected, and it has expressed that repeatedly,” he said.
Whether this will definitively reverse the bear market is uncertain, but it will prevent it from developing into something that “undermines and destroys the global economy,” he added.
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