Jim Paulsen Sees More Market Tailwinds Ahead

Tariffs and trade tensions continue to shape market sentiment, but despite the noise, the S&P 500 remains just 3.8% below its February 19 closing high. Still, with trade policy grabbing most of the headlines, it’s worth asking: What other forces might drive the market from here?

According to veteran Wall Street strategist Jim Paulsen, now retired and writing on his Paulsen Perspectives blog, several key indicators could begin offering much stronger support for equities in the coming months.

Paulsen points to five main pillars: the Fed funds rate, the 10-year Treasury yield, inflation, M2 money supply growth, and consumer confidence. Based on historical analysis going back to the 1960s, he finds that the S&P 500 tends to perform significantly better when these factors are moving in a favorable direction.

For example, when M2 money supply is expanding, the S&P 500 has returned an average of 12.7% annually, compared to just 2.2% during periods of slowing growth. Similarly, the index has gained an average of 10.5% more during times when the Fed is cutting rates rather than hiking them.

Each of the five factors individually correlates with stronger market performance, but the real kicker comes when all five are aligned. In such cases, Paulsen says, the S&P 500 has posted an average annual gain of 16.3%.

So where does that leave investors now?

Paulsen believes the market setup is turning more favorable. He notes that this bull market, which began in October 2022, has unfolded largely without help from the usual supports. The Fed has maintained a tight policy stance, and money supply growth has been unusually weak—just 0.8% annually, with real M2 contracting at a rate of -2.2%.

Long-term bond yields haven’t provided much relief either. The 10-year Treasury yield has hovered between 3.5% and 4.75%, lacking the kind of downward trend that typically bolsters stocks.

The one clear tailwind has been inflation. Since the rally began, inflation has dropped from 7.75% to 2.3%. And while new tariffs could cause a modest uptick, Paulsen expects inflation to remain stable—or even drift lower—over the next year.

Consumer confidence, meanwhile, has been weak but is showing early signs of recovery.

Paulsen concedes that some investors view this bull run as overstretched, especially given high valuations. But he argues that as economic growth slows and inflation remains tame, the environment could shift in favor of equities.

“If sentiment moves toward a low-inflation, sluggish-growth outlook,” he writes, “the market could benefit from multiple supports working in its favor. Investors should think twice before abandoning this bull market—it’s not out of fuel yet.