Jim Paulsen: All This Bull Market Needs Is Fed Rate Cuts
Markets bounced back on Monday, shaking off last week’s steep losses, as investors cheered rising expectations for Federal Reserve rate cuts.
Jim Paulsen, former chief investment strategist and founder of Paulsen Perspectives, says there’s still plenty of untapped fuel for this bull market — and it’s largely in the Fed’s hands.
In a new Substack post, Paulsen argues that the Fed’s overly restrictive stance has held the market back. Last week’s soft jobs data, he says, supports his view that monetary policy is too tight. If the Fed starts cutting rates in earnest, it could unleash “full bull” support for stocks.
“The current bull run began during Fed tightening and has grown under that pressure,” Paulsen notes. Throughout this rally, interest rates have remained high, the yield curve inverted, and real money supply growth weak — all signs of a constrained economy.
A persistently inverted yield curve typically signals pessimism about the economic outlook, while sluggish money supply growth suggests weak lending and cautious consumer behavior. Paulsen blames the Fed’s “chronic contractionary policy” for keeping bond yields high, the dollar strong, and confidence low.
But that could change quickly.
“If the Fed initiates and sustains a rate-cutting cycle, it could provide much broader support for equities than markets currently anticipate,” he says. That shift could weaken the dollar, lower bond and mortgage rates, and revive consumer sentiment.
To back his argument, Paulsen points to a striking chart comparing S&P 500 returns when key policy supports are in place versus when they aren’t. Since 1960, he says, the average annualized gain in the S&P 500 during Fed rate-cutting months has been 10.5 percentage points higher than during periods of tightening.
The biggest headwind to stocks, Paulsen adds, has been crushed consumer confidence. Since 1960, the S&P 500 has gained an average of 15.8% annually in months when confidence improved — compared to just 1.5% when it declined.
Now near historic lows, confidence is likely to rebound over the next year, Paulsen believes. If it does, “stock investors could enjoy a powerfully positive force they’ve rarely experienced during this bull market,” he says.
Still, not all strategists agree with Paulsen’s take. Bank of America, in a note to clients Monday, warned that markets are misreading the situation, conflating recession risks with stagflation. The bank says the Fed may not cut rates at all until 2026.
