Expect Even Greater Support for Market This Year,” Says Jim Paulsen
Tariffs continue to influence market sentiment, but despite ongoing uncertainty, the S&P 500 remains just 3.8% below its all-time closing high from February 19.
Still, let’s set aside the trade war for a moment. What other forces might shape market performance in the months ahead?
In a recent post on his Paulsen Perspectives blog, retired Wall Street strategist Jim Paulsen outlines five major factors that could offer increasing support to the market this year: the Fed funds rate, the 10-year Treasury yield, CPI inflation, M2 money supply growth, and U.S. consumer confidence.
Paulsen studied S&P 500 performance going back to the 1960s and found the index consistently performed better when these five indicators were favorable. For instance, the S&P 500 rose at an average annualized rate of 12.7% when M2 money supply growth was rising, compared to just 2.2% during periods of slowing growth.
Likewise, the index posted a 10.5% higher annualized return during periods of Fed rate cuts versus hikes. Lower 10-year yields, falling inflation, and rising consumer confidence each also correlated with stronger equity returns.
When all five factors were aligned positively, Paulsen says, the S&P 500 gained an average annualized 16.3%.
So where do things stand now?
Paulsen believes the market could soon benefit more broadly from all five supports. Most postwar bull markets have at some point been backed by easier Fed policy. But this bull run—starting in October 2022—has taken place almost entirely under a contractionary stance. M2 money supply has grown at just a 0.8% annualized rate, with real money supply actually shrinking by 2.2%—partly due to the Fed’s balance sheet reduction.
The bond market hasn’t offered much help either. Since the rally began, the 10-year Treasury yield has hovered between 3.5% and 4.75%, offering no clear downward trend typically associated with bull market support.
Of the five factors, only inflation has been a consistent tailwind, dropping from 7.75% in October 2022 to around 2.3% now. While new tariffs may nudge inflation higher, Paulsen expects it to remain mostly flat—or even decline slightly—over the next year.
As for consumer confidence, recent data shows signs of improvement from near-record lows.
Paulsen acknowledges concerns about the market’s age and elevated valuations, but sees room for optimism.
“If the narrative shifts toward low inflation and sluggish growth,” he writes, “many of the key supports outlined here could turn strongly positive. Investors should resist exiting this bull market until all its supports have truly run out.
