Analysts say whether the Federal Reserve can effectively reverse a potential bear market remains unknown, but it can prevent the bear market from turning into a "destructive force on the global economy".
Senior investor and Quantum Strategy strategist David Roche, who correctly predicted the financial crises of 1997 and 2008, warns that there may be a bear market in 2025 due to a smaller than expected interest rate cut, a slowdown in U.S. economic growth, and an AI bubble. However, he expects the Federal Reserve to intervene before the situation becomes "extremely dire".
Roche said on Monday in an interview: "I think a bear market is likely to come, but it may be in 2025. We now know the potential causes of it."
Roche predicts that the Federal Reserve will not cut interest rates to the expected 3.50%, and the Fed's median forecast for 2025 is 4.1%. According to the CME Group's FedWatch Tool, almost all market participants currently believe that the Fed's policy rate will be below 4.1% before September 2025.
Roche warns, "The second reason is that corporate profits will not reach the expected levels because U.S. economic growth will slow down."
The third reason is that the AI industry "has clearly entered into a bubble area" and will be a push for economic growth slowdown in the next six months.
He said, "I think these three factors are enough to cause a 20% drop in the U.S. stock market in 2025, which may start from the end of this year." He also added that this forecast did not take into account the results of the November U.S. presidential election.
Concerns about a U.S. economic recession were raised by a lower-than-expected non-farm report in July, which led to a sharp sell-off in the stock market. In addition, the impact of the arbitrage trade was lifted after Japan raised interest rates, which questioned the Federal Reserve's decision to keep rates unchanged at its recent meeting. However, the U.S. stocks rebounded quickly, with the S&P 500 index closed down less than 0.1% last week.
Now, Roche expects the Federal Reserve to cut interest rates by 25 basis points, but this will also lead to a gradual decline in profit margins, which will occur in 2025. He said, "If you want the Fed to lower interest rates, then the economy must slow down, the labor market needs to loosen, and profit margins will be under pressure."
If these factors trigger a bear market, the Federal Reserve will have enough room to respond, as according to Roche, Fed officials, consumers, and politicians all have a low tolerance for pain. Whether such measures can effectively reverse a bear market remains uncertain, but it can prevent a bear market from turning into a situation that "destroys the global economy".