MW These five unseen drivers could propel the bull market even higher, according to this Wall Street veteran

By Barbara Kollmeyer

All it needs is Fed rate cuts, says Jim Paulsen

Investors turned that jobs frown upside down on Monday, driving a bounce for major indexes after last week's meltdown. Rising expectations for Federal Reserve rate cuts this year gave investors yet another reason to buy the dip.

Our call of the day from Jim Paulsen of Paulsen Perspectives says this bull market has much more potential than investors realized, because several big pillars of traditional support for stocks have still not been tapped.

Much of that has to do with the Fed, which Paulsen believes has been too restrictive, a view he says is backed up by last week's weak jobs data. In a new Substack post, the now-retired, 40-year Wall Street investment strategist talks about how the Fed could help unleash "full bull" support.

Paulsen points out that the current bull run got its start when the Fed was tightening and has matured almost completely under that contractionary policy.

"During the current bull run, the funds rate has been kept high, the yield curve has persisted near inversion and the annual growth in the real money supply has remained subpar," he writes.

A yield curve inversion - when yields on long-term debt drop below those of short-term - is often seen as a sign of pessimistic and worried investors who expect a slowing economy. Sluggish money supply growth can indicate an economy that's struggling to expand, with fewer loans taken out and less activity as wary consumers tighten their belts.

Paulsen blames the Fed's "chronic contractionary monetary policy" for keeping those longer-term bond yields elevated, as well as the dollar strong and consumer confidence weak. Dollar strength can make it tough for American companies to compete abroad.

"Should the Fed finally sustain a cycle of cutting the funds rate, it would bring much broader support to the stock market than widely perceived," he says. Under that new stance, monetary growth would pick up, the dollar would weaken and bond yields, along with mortgage rates, would finally start to fall, with consumer confidence getting a boost.

Paulsen then moves to the below chart showing the extent of potential stock market performance "left on the shelf during this bull market" because those key pillars of support aren't yet being used.

The chart reflects the average annualized percent price gain in the S&P 500 index for all months since 1960, when those "key supports" were in place, versus when they weren't, he explained.

"Increasing or keeping the Fed funds rate at abnormally restrictive levels has probably significantly held back stock market results," he says. Since 1960, the average annualized S&P 500 percentage price gain during months when the Fed was cutting has been 10.5 percentage points greater than when rates were rising, he noted.

The biggest deterrent to bull market returns has been the "watershed destruction of U.S. confidence," says Paulsen. Since 1960, when U.S. consumer confidence has risen monthly, the S&P 500 average annualized percentage price gain was 15.8%, versus 1.5% during months of declining confidence.

The strategist says consumer confidence, nearly at record lows, is likely to head higher rather than lower in the next 12 months. "And, if it does, stock investors could enjoy a powerfully positive force they have rarely had the chance to savor yet during this bull run," he says.

To be sure, not everyone agrees with Paulsen that rate cuts are needed. Bank of America told clients on Monday that markets are "conflating recession with stagflation," and the Fed could hold rates until 2026.

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are modestly higher, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y inching up, and gold (GC00) giving up some gains as the dollar DXY rises.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              6329.94    -0.64%  1.68%   7.62%   20.80% 
   Nasdaq Composite                                                     21,053.58  -0.21%  3.11%   9.02%   28.64% 
   10-year Treasury                                                     4.21       -11.60  -20.00  -36.60  31.30 
   Gold                                                                 3424.3     3.33%   2.33%   29.74%  39.65% 
   Oil                                                                  66.26      -1.07%  -2.44%  -7.81%  -10.36% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Shares of Palantir (PLTR) are rising after the software group's earnings blew past forecasts, as it forecast stronger growth ahead.

Caterpillar $(CAT.AU)$ and Archer-Daniels Midland $(ADM.UK)$ earnings are on tap.

Restaurant owner Yum Brands (YUM) will also report, on the heels of Denny's $(DENN)$, whose shares are rising after the dining-chain spoke of a choppy environment, but improving customer demand.

Hims & Hers $(HIMS)$ stock is falling after the telehealth platform's third-quarter forecast disappointed.

Advanced Micro Devices (AMD) (see preview) and Super Micro Computer $(SMCI)$ are two big names to come after the close.

President Donald Trump will appear on CNBC's "Squawk Box" at 8 a.m. to discuss the economy and more.

The U.S. trade deficit is due at 8:30 a.m., followed by the Institute for Supply Management's July services index at 10 a.m.

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The chart

Some Wall Street forecasters have been talking about how a pullback is overdue for the S&P 500. The chart from Keith Lerner, chief market strategist at Truist, shows more than 30 corrections of 5% or more for the index since 2009. "The equity uptrend still deserves the benefit of the doubt. But after a powerful rally, some digestion is warranted, as is a reset of high investor expectations," said Lerner. He sees a classic "two steps forward, one step back" setup ahead, and suggests a focus on buying large-cap growth and technology stocks in the event of any pullback.

Top tickers

These were the most-active tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   PLTR    Palantir 
   NVDA    Nvidia 
   TSLA    Tesla 
   AMD     Advanced Micro Devices 
   GME     GameStop 
   AMZN    Amazon 
   AAPL    Apple 
   NIO     NIO 
   TSM     Taiwan Semiconductor Manufacturing 
   MSFT    Microsoft 

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August 05, 2025 06:48 ET (10:48 GMT)

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