Veteran investor David Roche has issued a cautionary forecast for the stock market, predicting a potential bear market in 2025.
Roche, a prominent expert at Quantum Strategy, points to the growing bubble in artificial intelligence (AI) as a key factor that could drive a significant market downturn.
According to Roche, the exuberance surrounding AI may lead to a sharp correction, potentially causing the S&P 500 to fall by up to 20% from its current highs.
David Roche expects the Fed to lower interest rates
David Roche also expects the Federal Reserve to lower interest rates at a smaller-than-expected pace.
Market participants want rates to come down to the 3.50% level by the end of 2025 but the US central bank currently plans on trimming only to 4.1% over the next 17 months, he said on “Squawk Box Asia” on Monday.
FOMC decided in favor of leaving interest rates unchanged this month – a decision that has faced criticism after the weaker-than-expected jobs data escalated concerns of an economic slowdown in the United States.
Chair Jerome Powell did, however, confirm that a rate cut in September is on the table if inflation remains on its current path. Note that Roche’s forecast of a bear market does not factor in the outcome of the 2024 US Presidential election in November.
Roche sees an economic slowdown ahead
Roche’s skepticism extends beyond monetary policy to broader economic conditions. He anticipates a slowdown in economic activity that will adversely impact corporate profits.
As the economy cools, Roche predicts that earnings expectations may not be met, leading to downward revisions and valuation concerns.
Disappointing corporate earnings can undermine investor confidence and prompt a shift from equities to safer assets.
Lower profits could also result in reduced capital expenditure and hiring, further dampening economic growth.
This shift from growth stocks to more defensive sectors could put additional pressure on market indices, exacerbating the downturn.
David Roche’s warning of a potential bear market in 2025 highlights growing concerns about the sustainability of the AI-driven market rally and the impact of monetary policy on economic stability.
As investors weigh the risks of a potential correction, Roche’s insights serve as a reminder of the volatility that can accompany periods of rapid market growth and the importance of remaining cautious in an evolving economic landscape.
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