Episode summary
We Asked Jim Paulsen Why He Sees a Correction Coming — He Gave Us 33 Charts That Make the Case
Excess Returns
· · Guests: Jim Paulsen
Summary
Jim Paulsen argued that the market is vulnerable to a 10% to 20% correction even without a recession, because economic momentum is weakening, policy has tightened, and AI enthusiasm has become frothy. He said the S&P 500 technology sector has already fallen about 10%, and that a pullback would likely hit the more speculative “new era” stocks harder than the broader market.
He made the case that the labor market and real economy are flashing slower-growth signals: zero job creation over the past year on his blended measure, rising unemployment and part-time employment, falling labor force growth, weak housing starts, and negative growth in real disposable income excluding transfers. He also argued that higher Treasury yields, a stronger dollar, firmer oil, and slower real money growth have effectively tightened financial conditions, with those effects likely to show up over the next several months.
Paulsen said the more important story is a leadership shift. He believes the divide between AI-driven sectors and the rest of the market has become extreme, while defensive positioning is thin and investor complacency remains high. He does not expect a recession or the end of the long bull market, but he thinks investors may need to reduce concentration in technology and AI and increase exposure to broader-market areas.
Key takeaways
- Paulsen expects a 10% to 20% correction in the next several months, but not a bear market, because he does not expect a recession.
- He said the blended household and payroll employment measure has averaged zero job growth over the last year, which he views as inconsistent with a healthy expansion.
- He argued that tighter financial conditions from higher yields, a stronger dollar and firmer oil will likely slow the economy with a lag.
- Paulsen said AI and technology have become too dominant, while the rest of the S&P 500 has lagged in earnings and market performance.
- He believes demographics point to lower U.S. growth and inflation for years, with bond yields eventually moving lower too.
Notable quotes
“Nowhere nowhere in our history that I've been in the business going back to the early 80s was zero job creation over any 12-month period considered something that was okay”
“what we've done with this war is we retightened policy. Now, how does it affect the economy”
“How could one/3 be on fire and most of the rest of it is barely moving”
How the episode opens
Jim, welcome back. Thank you very much for joining us again this month. Nice to see you. — You bet. You bet, Justin. It's good to be here. I always appreciate you guys every month chatting a little bit.
It's early July and it's pretty hot in most parts of the country weather-wise. Maybe not so hot from a market and economic activity standpoint. I think that's what we're going to work through with you today.
We have a number of slides you've given up to us graciously that you have put out on Pollson and perspectives which is your Substack. We encourage people to go check it out. And I think today, you know, you're kind of building on where we left off last month and making the case a little bit more strongly that things kind of don't look so great under the surface.
And so you we're kind of going to chunk it out in sections here. I think there's five or six maybe even more sections that you know you've isolated that you're paying a lot of attention to. So to start I'll sort of let you paint maybe a little bit broad picture and then we'll get into some of the charts here.
Okay, that sounds good. Yeah.
Yeah. I have uh I'd been expecting for some time that we'd have a leadership shift that goes on from kind of new era stocks to other areas of the market which I've been referring to as broad marketplace. and that has occurred um here.
But I'm now just I think since the AI surge from the March 30th low to the June 2nd top um has kind of put me over the edge a little bit in terms of I think that thing got frothy and uh and ever since then it's been a little uh you know sucking up all the financial market information in the room and it's all about AI and um it feels a little more like dot to me and there's several things that have creeped up on the indicators I watch.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- market correction
- tightening financial conditions
- labor market weakness
- ai tech enthusiasm vs economy
- treasury yields and demographics
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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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