Episode summary
Tech Spending Has a Cash Problem | Jim Paulsen on the Two Signals That Could Trigger a Correction
Excess Returns
· · Hosts: Jim Paulsen
Summary
Jim Paulsen argues the market is set up for a meaningful pullback even if he still does not expect a bear market this year. His base case is that economic growth weakens into the summer and fall, which would shift investors from worrying about inflation to worrying about growth. He says the underlying economy looks tepid, employment is weak, and the recent earnings strength is too concentrated in a narrow set of “new era” tech and communication stocks.
A major theme is the extreme bifurcation between AI-driven winners and the rest of the market. Paulsen says the stock market is being led by unprofitable tech stocks and smaller, riskier names, which makes the rally less stable than the late 1990s. He also points to corporate cash trends, economic surprise data, and policy tightening as signs that new-era spending may slow, potentially causing the leadership gap to narrow.
On inflation and the Fed, Paulsen expects oil-driven inflation to stay elevated for a few months but not become a lasting problem unless oil spikes much higher. He argues a Fed hike would be a mistake because the current inflation impulse is supply-driven rather than demand-driven. Overall, he thinks investors should tilt away from new era stocks and toward old era stocks, while expecting a sharp but temporary correction rather than a full bear market.
Key takeaways
- Paulsen expects a sharp stock market pullback, but he still does not think 2026 becomes a bear market.
- He says the economy could weaken in the summer and fall, which would push the market’s focus from inflation risk to growth risk.
- Paulsen argues the rally is unusually concentrated in new-era tech, including unprofitable stocks and small-cap tech, which makes leadership more fragile.
- He thinks oil may keep inflation elevated for a few months, but he does not see crude-driven inflation as a reason for the Fed to hike.
- He would underweight new era stocks and overweight old era stocks because policy tightening and slowing momentum could cool tech spending.
- Paulsen says AI can eventually spread benefits beyond tech, but the payoff is taking longer than many investors expect.
Notable quotes
“I'm getting more and more concerned about a meaningful pullback here in the stock market”
“I think the underlying economy still remains fairly tepid”
“I would move up to underweighted positions in new era and overweighted positions and old era stocks”
“Mag 7's not only getting beat by small little no-name companies, it's also getting beat by companies without any profits”
How the episode opens
For technology or innovation to be quote unquote successful, it has to at some point, I think it will here eventually, but it has to at some point be not just uh benefiting the sector that came up with it. You're also seeing another stripe changing. We're having unprofitable stocks, unprofitable tech stocks in particular, leading the tech world, if you will, overall.
So, Mag 7's not only getting beat by small little no-name companies, it's also getting beat by companies without any profits. Although I think we're going to avoid a bare market this year. I I do think we will.
I'm getting more and more concerned about a meaningful pullback here in the stock market.
Jim, welcome back. Thanks for jumping on with us today.
Oh, it's great to be here, Justin. Thanks. We always like to do these talks with you uh monthly where we talk about a whole host of things and relating to the market, the economy, um policy sort of and what you're seeing I think in the markets with a lot of the data sets and things that you're looking at trying to help our audience and investors sort of get a read as best we can as to where things maybe are headed and some of the more I think interesting things you know that you're paying attention to.
A lot of these or all of these charts actually are pulled from Paul and Perspectives, your Substack newsletter. Um, so we're really grateful and our audience is appreciative that you know some of the stuff that you're putting out to subscribers, you know, you you are sharing with us, which is which is which is really great. And it's always, you know, very important to get your perspective to help us understand sort of what what we're looking at when we look at these things.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai capex
- market correction signals
- oil inflation fed
- tech earnings concentration
- market breadth warnings
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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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