Episode summary
4.3% GDP Growth is an Illusion | Jim Paulsen on What You're Getting Wrong About 2026
Excess Returns
· · 57 min · Hosts: Jack Forehand, Justin Carbonneau · Guests: Jim Paulsen
Summary
Jim Paulsen argues that the headline 4.3% third-quarter GDP print makes the economy look stronger than it really is because trade distortions have been flattered by tariff-related import swings. Stripping out trade, he says GDP growth is closer to 2%, while other indicators such as payroll growth, retail sales, manufacturing PMIs, and unemployment duration point to a much more sluggish backdrop. He thinks the economy is weak now and could get a little weaker through the first half because policy lags from tighter money, an inverted yield curve, and still-restrictive financial conditions are only beginning to work through the system.
That weakness, in Paulsen’s view, is the key to the market setup for 2026. He argues this bull market has been unusually concentrated in “new era” companies and has been running under tight policy for most of its life, which helps explain why breadth has been so narrow and why the rest of the market has lagged. He thinks a shift toward easing, a softer dollar, and lower yields could wake up old-economy sectors and produce a broadening market even if growth stays modest and a recession is avoided.
Paulsen also flags several cautionary signs in technology. He says tech stocks have recently stopped outperforming broad market spending trends, corporate cash as a share of GDP has rolled over, and R&D spending relative to GDP has weakened. He expects tech to keep leading less reliably, while international stocks, cyclicals, financials, and selected small caps could benefit from easier policy and a weaker dollar. He is bearish on gold and commodities at current levels, calling gold an emotional blowoff.
Key takeaways
- Paulsen says third-quarter GDP of 4.3% is misleading and that underlying growth looks closer to 2% once trade distortions are removed.
- He argues unemployment and jobs data are the real warning signal, with payroll growth near stall speed and unemployment duration roughly double its postwar average.
- He expects the economy to stay sluggish through the first half of 2026 because Fed easing, money growth, and yield-curve effects work with a lag.
- Paulsen thinks the market’s leadership is too concentrated in new-era stocks and that easing could finally let old-era sectors participate.
- He sees warning signs in technology from weaker relative spending, softer corporate cash growth, and falling R&D intensity.
- He prefers stocks over bonds, but favors a broader mix outside U.S. mega-cap tech, including international, cyclicals, financials, and some small caps.
Notable quotes
“A lot of people say it's a K-shaped economy. The difference between wealthy and poor I think it's a noshaped economy. The difference between new era and old era”
“I think the economy is weaker than maybe most think right now, including the Fed, but but just in on Wall Street as well”
“it's actually been up 16% in each of the last three years”
“High valuations without emotional optimism is not nearly as risky as high valuations with emot with great emotional optimism”
How the episode opens
If we kind of take out this distortion of trade this year. So if we look at third quarter real GDP it was 4.3%. But if you take trade out say it was neutral then it was only 2.4.
If I look at year-to- date real GDP is 2 a 1 12 but without trade it's 1.8. A lot of people say it's a K-shaped economy. The difference between wealthy and poor I think it's a noshaped economy.
The difference between new era and old era. High valuations without emotional optimism is not nearly as risky as high valuations with emot with great emotional optimism. A lot of the character looks more like the bottom of a bear than it does the top of the bull.
And therein lies the opportunity.
Jim, it's great to have you back and happy new year. — Happy New Year to you guys, too.
Thanks. We always enjoy these conversations and I know our audience does as well because you have a way of kind of cutting through what is important in the markets, what's important in the economy, how investors should be thinking and you know just this I think um levelheaded approach to how you think about the markets and for this conversation we are piggybacking off of a video you did on your Substack where you were talking about the outlook for 2026. basics, the things that you're paying attention to, um, and sort of maybe how things are influencing the market and maybe where some things are a little bit cloudy and and specifically, you know, you talked about this idea, and we'll get into all this, this this no-shaped economy.
You were talking about how AI uh, fits into the outlook beyond the mega caps. Um, you recently wrote about, this wasn't in your 2026 outlook, but we want to talk to you about it, sort of some warning signs.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- headline gdp growth
- policy lags and fed easing
- no-shaped economy
- technology sector risks
- portfolio allocation
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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