MW Stock bulls should resist exiting this market. These five pillars of support are coming.

By Jamie Chisholm

Look for much more benefit to come from those this year, says Jim Paulsen

Tariff developments continue to be an important driver of stock market sentiment. Yet for all the chronic uncertainty, the S&P 500 sits just 3.8% below the closing high hit on February 19.

But let's be brave and set Trump's trade war aside. What are likely to be some of the other main drivers of market performance in the medium term?

In a new note published Friday on his Paulsen Perspectives blog, the now-retired, 40-year Wall Street investment strategist Jim Paulsen argues there are five key market supports that could become far more beneficial in the coming year.

They include the Fed funds rate, the 10-year Treasury yield BX:TMUBMUSD10Y, the annual rate of CPI inflation, annual growth in the M2 money supply and U.S. consumer confidence.

Paulsen has analyzed the average annualized percentage gain in the S&P 500 SPX during periods since the 1960s when these supports were in place and when they weren't.

For example, "for all months when the annual growth rate in the M2 money supply rose, the S&P appreciated on average at a 12.7% annualized pace compared to only a 2.2% annualized pace when the annual M2 money supply growth rate slowed," Paulsen says.

Similarly, the average annualized S&P 500 percentage price gain has been 10.5% greater during months when the Funds rate was cut as opposed to when it was increased. In addition, periods of declining 10-year yields, falling inflation and rising consumer confidence, individually, delivered better returns.

But what about when the factors are working positively at the same time? The next chart shows that if all five are providing support, the average annualized percent gain for the S&P 500 since 1960 is 16.3%.

So, how is the market currently set up in relation to the five factors?

The good news for bulls is that Paulsen reckons they should all, to varying degrees, offer more support in the coming months.

Nearly all post-war bull markets, at some point, have enjoyed the support of the Federal Reserve, according to Paulsen. Yet, the contemporary bull market began while the Fed was tightening policy and has existed "almost its entirety under a contractionary monetary policy."

Also, the growth in the money supply has remained far weaker during this bull market compared to the past, Paulsen notes. Since the bull market began in October 2022, the average annualized growth rate in M2 money supply has been "a ridiculously sluggish" 0.8% and the real money supply has contracted at a -2.2% annualized pace, partly a result of the Fed contracting its balance sheet.

"Overall, throughout this bull, the normal pillars of stock market support provided by a falling Fed Funds rate and a favorably ample rise in the U.S. money supply have largely been AWOL," says Paulsen.

The Treasury market has not been offering support either. Paulsen notes that when the bull run began, the 10-year yield was about 4.25% and has remained within a range of 3.5% to 4.75%. "Consequently, the current bull has never enjoyed a downward 'trending' long-term bond yield," he says.

Inflation is the only one of the five factors that has been supportive all through the bull run, falling from 7.75% when the rally began in October 2022 to just 2.3% now. "Many are concerned inflation will soon turn hostile for the stock market because recently announced tariffs are expected to force inflation higher. However, while the inflation rate may rise slightly, I expect it to trend mostly sideways if not even a bit lower during the coming year," Paulsen says.

Finally, U.S. consumer confidence has been pretty poor of late. But as data this week showed it may be picking up from near record lows.

Paulsen accepts that many think the bull market is looking old and that valuations are high compared to historic norms.

But he concludes: "If the consensus narrative shifts towards a low inflation-sluggish growth scenario, many of the key stock market supports highlighted in this note will turn decidedly positive for the stock market. Investors should avoid exiting this bull market until all its supports have been exhausted."

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are lower as benchmark Treasury yields BX:TMUBMUSD10Y are little changed. The dollar index DXY is higher, while oil prices (CL.1) rise and gold (GC00) is trading around $3,297 an ounce.

   Key asset performance                                                Last       5d     1m     YTD      1y 
   S&P 500                                                              5912.17    1.88%  3.97%  0.52%    12.03% 
   Nasdaq Composite                                                     19,175.87  2.34%  6.66%  -0.70%   14.59% 
   10-year Treasury                                                     4.431      -8.70  11.70  -14.50   -7.10 
   Gold                                                                 3318.2     0.70%  2.15%  25.72%   40.33% 
   Oil                                                                  61.34      0.87%  4.00%  -14.65%  -21.24% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The chart

Markets don't often deliver set ups like this. Japan's TOPIX equity index JP:TPX has meandered within a fairly tight range of several months, bookended by two V-shaped dives and rebounds. As BTIG's technical strategist Jonathan Krinsky says: "The TPX nearing best levels since last summer. That's a nearly one-year base poised for a breakout." The Japanese market can be accessed via, among others, the iShares MSCI Japan ETF EWJ.

Source: BTIG.

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   HOLO    MicroCloud Hologram 
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May 30, 2025 06:49 ET (10:49 GMT)

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