Jim Paulsen Sounds Alarm On US Stocks, Sees Correction Signs ‘Ripening’ – ‘My Enthusiasm For Stocks Is Waning…’

Veteran economist Jim Paulsen said he is growing increasingly cautious on U.S. stocks but has played down the chances of a recession in the near term.

• Paulsen flagged factors, including tighter economic policies and the delayed effects of higher oil-driven inflation, as key concerns for a market correction.
• He questioned whether investor enthusiasm surrounding AI has become excessive.
• Paulsen said the impact of a market correction could be limited due to reasonably valued traditional companies that have largely been left behind during the current bull run.

Veteran economist Jim Paulsen said he is growing increasingly cautious on U.S. stocks, warning that signs of a meaningful market correction are “ripening” even though a full-blown bear market remains unlikely this year.

Paulsen pointed to several factors fueling his concern, including tighter economic policies, the delayed effects of higher oil-driven inflation, and a widening gap between high-growth technology companies and more traditional businesses.

U.S. equities have delivered strong gains over the past year. The Dow Jones Industrial Average is up nearly 6.6% year-to-date and more than 21% over the past 12 months. The S&P 500 has advanced over 9% this year and almost 24% over the past year, while the tech-heavy Nasdaq Composite has led the rally, climbing more than 14% year to date and over 35% over the past year.

AI Rally Seems Exuberant

Paulsen questioned whether investor enthusiasm surrounding artificial intelligence has become excessive, noting that Wall Street optimism appears increasingly disconnected from weakening sentiment among consumers and businesses.

“My enthusiasm for stocks is waning as I watch Wall Street excitement – dare I say exuberance – about AI technologies explode,” Paulsen wrote in a Substack post on Monday.

The economist noted that the stock market continues to rise despite a decline in the U.S. private-sector cash-to-GDP ratio, even as valuations have become increasingly stretched. He added that, on a historical basis, the S&P 500 is trading at levels rarely seen since World War II when adjusted for long-term trends.

Recession Is Not On The Cards

Despite these concerns, Paulsen does not expect a recession in the near term. He noted that households and businesses remain financially healthy, with manageable debt levels and ample liquidity. These factors should help support economic activity even if market conditions become more volatile, he added.

Paulsen said the impact of a market correction could be limited by the presence of many reasonably valued traditional companies that have largely been left behind during the current bull run. If investors begin shifting away from high-growth and AI-related stocks, these underowned “old era stocks” could attract fresh interest and help reduce the market’s overall downside risk.

“Finally, any short-term downside risk for the stock market is probably limited by so many stocks (old era stocks) which remain reasonably priced since they have not participated much during this bull market. In this manner, any stock market correction could be buffered by disappointing and widely underowned old era stocks,” he added.

Retail Sentiment On ETFs Tracking Broader Indices

Retail sentiment surrounding SPY, QQQ, and DIA ETFs on Stocktwits trended in the ‘bullish’ territory.

At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, edged 0.3% higher, while the Invesco QQQ Trust ETF (QQQ) and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.4% each.

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