Investor and strategist David Roche expects the economy to enter a bear market in 2025, he said on Monday.

The market will be driven down by rate cuts that will disappoint, a slowing economy and an AI bubble, he said during a CNBC interview.

Roche predicted the Fed wont reduce rates to the markets desired 3.50%.

The Feds median forecast for 2025 is 4.1%, according to the CME FedWatch Tool.

Nearly all market participants expected rates below 4.1% by September 2025, the data said.

The veteran investor said the second thing is that profits [wont] fulfill expectations, because the economy is going to be slowing.

Investors face a dual-ended sword, since the economy has to slow to warrant rate cuts, Roche explained.

Piling on to the economic unknowns is the growing AI sector, which Roche said has entered bubble terrain decisively   reminiscent of the dot-com bubble that peaked in the early 2000s.

I think there is enough in those three factors to cause a bear market of minus 20% in 2025, maybe starting at the end of this year, Roche said.

He said the Fed wont make interest rate cuts of 50 basis points.

Theres no need for 50, he said. The economy remains too resilient.

The strategist said he thinks the Fed will issue cuts of 25 basis points, though he warned the move will lower profit margins in 2025.

If you want the Fed to reduce interest rates, then the economy has to slow down interest, labor markets have to slacken off, and margins will come under pressure, he said. 

Though he warned of a bear market, Roche said the Fed can adjust to handle the decline.

The likelihood is [that] the Fed has plenty of room to cut rates if things turn out worse than expected, and it has repeatedly said so, he said. 

While there is no guarantee the Fed can wholly jumpstart a bear market, Roche said it will be able to stop it from becoming draconian or something that would undermine and destroy the world economy.

Of course, political events pose another huge risk to economic growth, Roche said. 

His theory of an impending bear market does not factor in the results of the 2024 presidential election, which could hugely impact the market.

Take crypto-related stocks, for example, which have swung back and forth in recent weeks since investors have their fingers crossed that former President Donald Trump will be re-elected and relax industry regulations. 

Bitcoin shares soared after Trump was shot in an assassination attempt, since his odds of winning the election jumped. 

The crypto stock spike dropped off the week after President Joe Biden dropped out of the race and Vice President Kamala Harris announced her intention to run, since odds of a Trump win faltered.

Meanwhile, the Feds decision to keep interest rates unchanged caused investors to panic last week and led a sell-off that shook the market. 

The selloff was worsened by the Bank of Japans decision to hike the countrys borrowing costs, forcing many global investors to undo their strategic carry trades.

The global selloff, as well as a weaker-than-expected US jobs report, trampled investors’ hopes of a soft landing.

But the market made a turnaround, with the S&P 500 down less than 0.1% at the end of last week.