Where Does Cem Karsan Think the Market Is Headed in 2025?

Cem Karsan, the founder and managing partner of Kai Volatility Advisors, has a strong track record as an investor and analyst of the stock market.

Recently, Karsan has been voicing some rather dismal views on the stock market’s moves over the next 12 months, presenting a bearish view that investors may want to consider for risk management purposes.

Where does Cem Karsan see the stock market heading in 2025, and are there any bright spots in the noted investor’s outlook?

First, a Bit About Cem Karsan’s Investment Thinking

Unlike many prominent investors who tend to focus mostly on the buying and selling of stocks, Karsan is first and foremost an expert in the derivatives market.

In his view, options offer investors a more efficient mechanism for betting on the performance of an asset over a given period of time. Moreover, Karsan argues that an understanding of derivatives can help investors see more precisely the range of probable outcomes for a stock or even an entire index.

Slightly more controversially, Karsan argues that derivatives are increasingly becoming the real market, with the actual underlying assets making up a gradually less important part of the stock market’s inner workings.

In terms of volume trends, it’s hard to dispute his reasoning. Average daily volumes in options contracts have surged in recent years, partially as a result of retail investors increasingly having access to options trading through their brokerages.

On the other side of the coin, however, there’s still a strong argument to be made for the historically superior results of buying and holding high-quality stocks.

Cem Karsan’s Short and Long-Term Views

Fortunately, there is no guesswork needed to determine where Cem Karsan sees the market going this year.

In a recent podcast interview, he laid out in very specific terms what he expects to see in 2025. So, what is Cem Karsan’s stock market forecast? According to Cem Karsan, a dip as large as 10 percent could occur in the early weeks of the year, followed by a rally. This rally, however, would likely be temporary and would eventually give way to a more significant decline.

This view elaborates on a more long-term cautionary note Karsan has struck recently about the set of risks the American stock market is facing.

In his view, rising populism in response to a long cycle of supply-side economics creates risks of protectionist trade policies, higher inflation and higher interest rates.

These outcomes could be negative for the stock market in the long run and exacerbate some of the problems we’re already seeing.

How Do Karsan’s Views Line Up With Other Takes on the Market in 2025?

Cem Karsan is far from the only prominent investor entering 2025 with apprehension. In November, Stanley Druckenmiller sold his entire stake in NVIDIA and has since been piling money into Citigroup. This may suggest a more defensive, value-oriented approach to investing in 2025.

Warren Buffett, though he has recently found ways to deploy some of Berkshire Hathaway’s massive cash stockpile, is still sitting on near-record levels of cash and buying stocks only very selectively.

Paul Tudor Jones and Larry Fink have both raised alarms about persistent inflation that could become a secular part of the market thanks to high government spending.

Many of these views neatly tie into one of the biggest elephants in the room of the investing world right now, namely the sky-high price of US stocks. Driven by AI enthusiasm and a bullish rebound coming out of the 2020-21 era, the S&P 500 has delivered two consecutive years of returns exceeding 20%.

The US stock market’s capitalization, however, is now more than double GDP, a deeply concerning signal of how expensive American securities have become.

This high pricing is compounded by the fact that the American stock market has become highly concentrated. The Magnificent Seven, a group of the top mega-cap tech stocks, now make up about 33% of the S&P 500’s total capitalization.

This makes the stock market particularly vulnerable to tech downturns, as a selloff among these stocks can drag the entire S&P 500 down just as their surge in the last couple of years has dragged it quickly upward.

Indeed, we’ve already seen some of the costliest stocks wobble in response to even very modest indications of economic headwinds.

A recent jobs report that came in better than expected, for example, caused shares of NVIDIA to drop more than 3% on worries that the Fed wouldn’t be able to unwind interest rates as much as previously projected in 2025.

Other tech stocks followed suit, indicating the degree to which many of these high-flying stocks are priced on assumptions of best-case outcomes.

That said, there are also still plenty of market bulls predicting that the market will move higher this year, though at a more moderate pace than in 2023 or 2024. Goldman Sachs, for example, projects that the S&P 500 will return a total of around 10% this year. The investment bank notes, however, that the stocks outside of the Magnificent Seven tech giants could see more of these gains than in past years.

Is There Any Good News in Karsan’s Outlook?

Although Karsan is sounding quite bearish on the first couple of months of 2025, his outlook for later in the year isn’t quite so bleak.

Late in 2024, he laid out the possibility of buying in March of this year once his projected market selloff had taken place.

As he himself pointed out, this timing would also give the incoming Trump administration time to firm up its policies, allowing investors to buy stocks with much more concrete information regarding political risks.

Karsan’s longer-term outlook, unfortunately, may not bode particularly well for the American stock market’s performance. If, as he expects, populist and inflationary economic policies continue to pile on, the stock market could be in for a period of slower returns ahead. That said, these outcomes are far from certain, and the negative effects of government policy could be counterbalanced by technological innovations and growth in the underlying economy over the coming years.

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