David Roche, Independent Strategy Chairman
Causes: Modest Interest Rate Cuts, US Economic Slowdown, AI Bubble
A veteran Wall Street investor has predicted that the U.S. stock market will enter a bear market in 2025. He diagnosed that three factors?monetary policy, growth, and the artificial intelligence (AI) bubble?overlapping could lead to a plunge of as much as 20%.
David Roche, a global investment strategist and chairman of Independent Strategy, appeared on CNBC on the 12th (local time) and said, "2025 will be a bear market," citing a smaller-than-expected rate cut, slowing U.S. economic growth, and the AI bubble as causes. He added, "I believe these three factors have the power to cause a 20% crash in the stock market in 2025," and noted, "It could start as early as the end of this year." However, he also mentioned that this forecast does not take into account the outcome of the U.S. presidential election scheduled for November.
Roche pointed first to the smaller-than-expected cut in the benchmark interest rate as a major cause of the 2025 bear market. The median forecast for the year-end 2025 benchmark rate presented earlier by the Federal Reserve (Fed) in its dot plot is 4.1%, but market participants expect it to fall below 4.1% much sooner. He analyzed that there is a large gap between the Fed’s and the market’s outlooks.
He predicted that the Fed will begin easing monetary policy by cutting the benchmark interest rate by 0.25 percentage points in September. He also noted that this could gradually reduce profit margins in the financial sector through next year. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on that day fully priced in a 100% probability that the Fed will cut rates by at least 0.25 percentage points in September.
Along with this, Roche forecasted that the AI sector "has entered bubble territory and will burst within the next six months." He said, "This will act as a catalyst for slowing economic growth," and added, "Corporate earnings will also fail to meet expectations." This reinforced the so-called AI bubble theory that had been raised inside and outside Wall Street ahead of earnings announcements from big tech companies such as Amazon, Microsoft (MS), and Google Alphabet, which have made massive investments in AI. However, these companies reaffirmed their plans to continue large-scale AI investments in their earnings reports. The market is also pushing back against the bubble theory, calling it an overreaction.
However, Roche predicted that even if these factors cause a bear market, it will not lead to the worst-case scenario. This can be interpreted as meaning that before a sharp drop of up to 20% as per his scenario, the Fed or government may intervene to soothe investors and stabilize the market. The basis for this is that the "pain threshold" (the minimum stimulus amount that causes pain) of Fed officials, consumers, and politicians is very low.
Roche said, "Even if the situation worsens more than expected, the Fed has enough room to cut rates, and historically it has done so," adding, "While there is no guarantee that rate cuts will reverse the stock market decline, it can prevent a situation where the global economy is destroyed."
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