In 2025, a bear market is predicted by David Roche, but the Fed will intervene before it becomes excessively strict.

• An AI bubble, along with a slowing U.S. economy and smaller-than-expected rate cuts, is predicted by veteran investor David Roche to cause a bear market in 2025.
• The possibility of a bear market with a minus 20% decline could occur in 2025, possibly starting at the end of this year, but the Fed will have the flexibility to make adjustments, according to him.

An artificial intelligence bubble, along with smaller-than-expected rate cuts and a slowing U.S. economy, is predicted by veteran investor David Roche to cause a bear market in 2025.

According to a strategist at Quantum Strategy, a bear market is likely to occur in 2025, and the cause is now known, as stated on CNBC's "Squawk Box Asia" on Monday.

Roche anticipates the Fed will not lower rates to the market's preferred 3.50% in 2025. The Fed's median forecast for 2025 is 4.1%, but nearly all market participants expect rates to be below 4.1% by September 2025, according to the CME FedWatch Tool.

Roche warned that profits won't fulfill expectations because the economy is going to slow down.

The AI sector is the third factor that Roche anticipates will cause a bear market.

Roche stated that the company has entered bubble terrain decisively and will exit it over the next six months or so, making it one of the drivers of the slower economic growth.

He predicted that a bear market of minus 20% could occur in 2025, possibly starting at the end of this year, based on three factors, but did not factor in the outcome of the U.S. Presidential election in November.

The Fed's decision to maintain interest rates was challenged last week due to a weaker-than-anticipated jobs report, which sparked recession concerns and caused a market sell-off. This was further exacerbated by the unwinding of carry trades following Japan's interest rate increase.

Last week, the S&P 500 ended down less than 0.1%, indicating a sharp recovery in the markets.

Roche anticipates that the Fed will increase interest rates by 25 basis points, but this will result in lower profit margins, which will gradually decrease over the next five years.

To reduce interest rates, the economy must slow down, labor markets must relax, and margins will be under pressure, according to him.

According to Roche, if a bear market is triggered by certain factors, the Fed will have the flexibility to address it because Fed officials, consumers, and politicians have a low pain threshold.

The likelihood is that the Fed has room to cut rates if things turn out worse than expected, as it has repeatedly stated.

The bear market may not be decisively turned, but it will prevent it from causing significant harm to the world economy, according to him.