Hidden Market Forces at Play

Jim Paulsen Says the Bull Market Is Just Getting Started — If the Fed Cuts Rates

Stocks snapped back on Monday, with investors shaking off last week’s selloff and betting on Federal Reserve rate cuts ahead. But according to veteran strategist Jim Paulsen, the real rally hasn’t even started yet.

In a new Substack post, the former chief investment strategist — now heading Paulsen Perspectives — says Wall Street is underestimating how much firepower this bull market still has. And the key to unlocking it? Rate cuts from the Fed.

“This bull market has been running on fumes,” Paulsen writes. “Imagine what it could do if the Fed actually helped.”

He points out that the current rally began and has matured while the Fed has kept interest rates high, the yield curve inverted, and money supply growth unusually weak — all hallmarks of a restrictive monetary environment. Typically, that kind of setup would slow the economy and limit market gains.

Paulsen argues the Fed’s “chronic” tight policy has kept longer-term bond yields elevated, strengthened the dollar, and weighed down consumer confidence — all factors that have held stocks back.

But if the Fed begins a sustained rate-cutting cycle?

“It would trigger far more support for equities than most realize,” Paulsen says. Falling rates would likely weaken the dollar, ease bond and mortgage rates, boost the money supply, and lift consumer sentiment.

He backs up his claim with a historical comparison: Since 1960, the S&P 500 has delivered annualized returns 10.5 percentage points higher during months when the Fed was cutting rates versus when it was hiking.

Consumer confidence plays a major role too. When it rises, the average annualized gain in the S&P 500 jumps to 15.8%. But when confidence falls, that drops to just 1.5%.

With sentiment currently near historic lows, Paulsen believes it’s more likely to rebound than fall further in the year ahead — a shift that could act as a powerful tailwind for stocks.

“If confidence improves, it would be a rare and potent force that investors have barely benefited from during this entire bull run,” he notes.

Of course, not everyone is as optimistic. Bank of America warned Monday that the market may be misreading the signals — confusing recession risks with stagflation — and that the Fed might keep rates unchanged until 2026.

Still, Paulsen’s message is clear: this bull market isn’t running out of steam — it’s waiting for a green light from the Fed.