Veteran Strategist Warns Stocks Have ‘Used Up' Room to Keep Climbing

Jim Paulsen, a veteran market strategist, says the U.S. stock market has used up most of the room it traditionally relies on to climb higher, even as slowing momentum starts to press against record valuations.

Paulsen, a longtime economist who spent years as chief investment strategist at the Leuthold Group, made the case on CNBC’s Closing Bell Overtime. He pointed to profits, valuations, and investor positioning all sitting near historic extremes.

Paulsen Flags Record Stock Market Valuations

Paulsen said in July that the S&P 500’s price level sits about 60% above its post-World War II trend line. That level has only been matched once before, near the peak of the dot-com bubble.

Trailing 12-month earnings are also 60% above their own trend line. Paulsen called that a record, exceeding even prior cycle peaks such as the dot-com era.

Corporate profit margins and non-residential investment spending, measured against gross domestic product, have also reached record highs. Forward earnings estimates compared with trailing profits have also been unusually high, Paulsen said. That measure is nearing record territory in data going back to 1990.

Valuations are not all at record levels, Paulsen said, but by most measures they remain historically high. He added that household exposure to equities, as a share of financial assets, sits at a record high. Cash holdings relative to market value are close to a record low.

Paulsen called the overall mood complacent, since investors have grown used to buying every dip.

“No one’s worried about recession anymore, Michael, because we haven’t had one for 16 years.”

Jim Paulsen, CNBC

The S&P 500 is up near 12% YTD. Image Source: Trading View

Slowing Momentum Could Flip the Rate-Cut Script

Paulsen flagged weakening data, including recent ADP payroll figures, softer retail sales, and sluggish housing activity. He cited the Citigroup U.S. Economic Surprise Index, which tracks how incoming data compare with forecasts. That gauge has fallen from 60 to 25 in recent weeks.

Paulsen warned that falling rates could coincide with falling stock prices, rather than trigger the rally investors typically expect. That risk grows if the rate declines reflect weakening growth rather than cooling inflation.

He also pointed to the dollar. In real terms, it remains within 8% of the all-time high it set in 1970.

He also downplayed fears tied to the Treasury’s bond buyback plan, which billionaire investor Stanley Druckenmiller criticized. Paulsen called the recent yield moves more noise than substance.

Oil prices are adding further pressure on the system, Paulsen said. That pressure weighs on both corporate margins and household purchasing power.

Whether that slowing momentum turns into an outright pullback remains unclear. Much may depend on how quickly the underlying data keep deteriorating in the weeks ahead.