Veteran market strategist Felix Zulauf, founder and CEO of Zulauf Consulting, has spent over five decades navigating the complexities of financial markets. Renowned for his prescient market calls, including the December 2021 peak and the October 2022 bottom on Financial Sense in more recent years, Zulauf continues to provide investors with invaluable insights. In a recent interview, he delivered a stark warning about the current state of the market, highlighting the risks of an impending bubble burst, the challenges posed by liquidity constraints, and what investors should expect in 2025.
Podcast audio: Felix Zulauf: US Stock Market in Bubble, Risk of Bursting in 2025
A Historic Bubble in the US Stock Market
Zulauf describes the current US stock market as one of the most overvalued in history, placing it in rarified company alongside the bubbles of 2000 and late 2021. "Out of the last 140 years, this is one of the three most overvalued markets that we see," he asserted.
The market's extreme concentration in a handful of stocks particularly troubles Zulauf. "When everybody around the world invests in the world index, 73% goes to the US market. And out of those 73%, maybe 35% or more goes into 10 stocks. That is the biggest concentration and the biggest excess that we have ever seen in a market bubble," he explained. These ten stocks—predominantly US tech giants like the "Magnificent Seven"—have driven market gains, but Zulauf warns that such concentration could amplify losses when the bubble bursts.
The Liquidity Cycle: Drying Up
A key driver of current market conditions has been the Federal Reserve’s injection of liquidity through its reverse repo program, which added $2 trillion into the financial system. However, Zulauf notes that this liquidity is now largely depleted, with only limited funds remaining in the Treasury’s general account. "We are in the later stage of the liquidity cycle," he said. "And when liquidity dries up, usually the bubble breaks. A bubble needs growing liquidity, ever-growing liquidity, to keep growing. And when liquidity begins to slow down…it cannot support a growing bubble."
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See Global Liquidity vs. Debt Maturity Wall: What Investors Need to Know About 2025 for more.
This drying liquidity, combined with the natural rhythm of the four-year market cycle, has Zulauf predicting that the bubble will likely burst in 2025. He anticipates heightened volatility throughout the year, marked by sharp swings in both directions.
2025: A Roller Coaster of Market Volatility
Zulauf envisions several distinct phases for the market in 2025. He predicts an early-year peak, potentially pushing the S&P 500 to or above 7,000. However, this could be followed by a 15% correction, after which the market might rally again, driven by euphoria. Eventually, the bubble could burst, ushering in a significant downturn. "We could see the market at some point trading below 5,000 and at some point trading above 7,000 this year in 2025," Zulauf explained.
Unlike the relatively smooth upward trajectory seen over the past two years, Zulauf expects 2025 to be marked by wild swings. "It’s going to be down, up, and then down big," he said. This environment, he noted, will be particularly challenging for buy-and-hold investors, who may need to adopt more defensive strategies.
Policy Risks Under a New Administration
Zulauf also highlighted potential policy risks under a new Trump administration. While pro-growth policies like tax cuts and deregulation could boost the economy in the short term, Zulauf sees significant risks in the administration’s protectionist tendencies, particularly with tariffs. "Tariffs are a tax," he warned. "If the US introduces tariffs, the others will not sit tight and do nothing. They will also introduce tariffs. And then we have the potential of trade war protection."
Such protectionism, Zulauf believes, is "the opposite of what prosperity is" and could lead to a weaker economy and greater volatility. Drawing historical parallels, he noted that the proposed tariff levels could match those seen during World War I through World War II—periods marked by economic difficulty. "We are entering a disruptive economic situation—very volatile, very risky, and there is no smooth sailing," he concluded.
Safe Havens and Strategic Opportunities
For investors seeking to navigate this challenging environment, Zulauf offered several strategies:
Temporary Bond Market Rally
Zulauf sees the potential for a significant rally in the bond market early in 2025. "When we approach 4.50% to 5% in 10-year treasuries, we could see a temporary safe haven," he said. He expects yields to decline by as much as 100 to 150 basis points, creating an opportunity for medium-term gains in bond prices. However, he emphasized that this would be a counter-trend rally within a secular bear market for bonds, requiring precise timing for both entry and exit.
Gold as a Hedge
Gold, Zulauf noted, could initially decline alongside other assets as liquidity dries up. However, he sees support for gold around $2,400, making it an attractive buying opportunity. "If the problems get serious—on trade, geopolitics, and economics—then, of course, there could be some money flowing into gold," he said. Longer term, he believes gold could rise "far above $3,000" as economic and geopolitical challenges intensify.
Positioning for a New Market Cycle
Looking beyond 2025, Zulauf predicts a dramatic shift in market leadership. "The next cycle will bring on new leadership," he said, identifying commodities, materials, energy stocks, and value stocks as likely outperformers in an inflationary environment. He envisions a scenario where oil could reach $150 per barrel and gold could surpass $3,000. "It will be a completely different leadership," he emphasized, contrasting it with the current dominance of tech growth stocks.
A Warning to Newer Investors
Zulauf concluded with a cautionary message for investors, particularly those who have never experienced a bear market. "The average guy, when he enters a stock market cycle, usually pays the price that is about 20% below the top," he explained. This means that many investors may find themselves in negative territory after just a 20% decline, despite having participated in the bull market.
He urged investors to reduce exposure and add portfolio protection going into the second half of 2025, warning that the buy-and-hold strategies that have worked so well in recent years may no longer suffice. "It’s going to be challenging, and it will be very, very different from the characteristics that we saw in the last two years," he said.
Conclusion
Felix Zulauf’s 2025 market outlook paints a picture of heightened volatility, drying liquidity, and significant risks. While opportunities may unfold in bonds, gold, and commodities, Felix believes investors will need to exercise caution, adopt strong risk management practices, and remain flexible in the face of changing market dynamics. As Zulauf aptly summarized, "The coming year will require careful positioning, and it will be very different from what we’ve seen in the recent past."
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