Investor and strategist David Roche said Monday he expects the economy to enter a bear market in 2025.
He said the market would be driven down by disappointing interest rate cuts, a slowing economy and an AI bubble. During an interview with CNBC.
Roche predicted the Fed would not cut interest rates to the 3.50% level the market wants.
The Fed’s median forecast for 2025 is 4.1%. According to the CME FedWatch tool:.
Nearly all market participants expected interest rates to fall below 4.1% by September 2025, according to the data.
The veteran investor said, “The second reason is that profits are [won’t] The economy will slow down, so we won’t be able to meet expectations.”
Roche explained that investors face a double-edged sword because the economy would need to slow to justify a rate cut.
Adding further uncertainty to the economy is the growing artificial intelligence sector, which Roche said is “definitely in bubble territory,” reminiscent of the dot-com bubble that peaked in the early 2000s.
“We believe these three factors are enough to trigger a bear market of -20%, perhaps starting later this year and into 2025,” Roche said.
He said the Fed will not cut rates by 50 basis points.
“We don’t need 50,” he said. “The economy is still too strong.”
The strategist believes the Fed will cut rates by 25 basis points but warned that the move would hurt profit margins in 2025.
“If we want the Fed to cut interest rates, the economy will see lower interest rates, the labor market will slacken and profit margins will get squeezed,” he said.
While warning of a bear market, Roche said the Fed could adjust to handle any downturn.
“The possibility is [that] “If things turn out to be worse than expected, the Fed has plenty of room to cut rates, and they’ve said that repeatedly,” he said.
There’s no guarantee the Fed can fully energize a bear market, but it can stop it from becoming “draconian” or “debilitating and destructive to the global economy,” Roche said.
Of course, political events pose another big risk to economic growth, Roche said.
His theory about an impending bear market doesn’t take into account the outcome of the 2024 presidential election, which could have a major impact on the market.
Cryptocurrency stocks, for example, have been volatile in recent weeks as investors pray for former President Donald Trump’s reelection and deregulation of the industry.
After President Trump was shot in an assassination attempt, his chances of winning the election soared, sending Bitcoin shares soaring.
The surge in crypto stocks slowed as the chances of a Trump victory faded a week after President Joe Biden dropped out of the race and Vice President Kamala Harris announced her intention to run.
Meanwhile, the Fed’s decision to keep interest rates on hold last week caused investors to panic, sparking a market-shaking sell-off.
The sell-off was exacerbated by the Bank of Japan’s decision to raise the country’s borrowing costs, forcing many global investors to unwind strategic carry trades.
A global stock sell-off and weaker-than-expected U.S. employment data dashed investor hopes of a soft landing.
But the market turned around, with the S&P 500 down less than 0.1% at the end of last week.
