Stock Bulls Should Resist Exiting the Market: Five Pillars of Support Ahead

As stock market fluctuations continue to create uncertainty, investment strategist Jim Paulsen emphasizes that stock bulls should think twice before exiting the market. In a recent note on his blog, Paulsen Perspectives, he outlines five key market supports that could significantly boost stock performance over the next year. These include the Fed funds rate, the 10-year Treasury yield, Consumer Price Index (CPI) inflation, the growth in the M2 money supply, and U.S. consumer confidence.

The Current State of the Market

Despite ongoing tariff developments and trade tensions, the S&P 500 index stands just 3.8% below its record peak achieved on February 19, 2025. Paulsen’s analysis suggests that the persistent issues related to tariffs shouldn’t overshadow the underlying strengths that could drive market performance.

Analyzing the Support Factors

Paulsen’s in-depth examination illustrates how these five factors have historically influenced market gains since the 1960s. His data reveals that during periods when the annual growth rate in M2 money supply rose, the S&P 500 averaged an impressive annualized gain of 12.7%. In stark contrast, this gain dropped to only 2.2% when growth in the M2 money supply weakened.

Similarly, the S&P 500 demonstrated an average annualized percentage growth of 10.5% greater during months when the Fed funds rate was cut compared to when it was increased. If multiple factors are supporting the market simultaneously, gains are even more pronounced. In instances where all five factors are positive, the average annualized gain on the S&P 500 since 1960 reaches a remarkable 16.3%.

The Present Economic Landscape

Looking ahead, Paulsen remains optimistic about the contributions of these market supports in the coming months. Although the ongoing bull market has operated under historically tight monetary conditions, there is hope for change. Paulsen stresses that most post-war bull markets have benefitted from supportive monetary policy from the Federal Reserve, which has largely been absent in the current environment.

Since its inception in October 2022, the bull market endured a muted average annualized growth rate of only 0.8% in the M2 money supply, with a contraction of -2.2% in real terms. Paulsen notes that the Treasury market has similarly failed to provide a supportive backdrop for stocks, as the 10-year yield has remained relatively stable within a narrow range between 3.5% and 4.75%.

Inflation and Consumer Confidence

Inflation stands out as one positive element during the current bull run, dropping from a sharp 7.75% when the rally began to just 2.3%. While there are concerns that new tariffs could elevate inflation pressures, Paulsen predicts that inflation will remain stable, either sideways or slightly decreasing in the coming year.

Additionally, despite declining consumer confidence levels, recent data shows signs of recovery, indicating resilience among consumers. Improved consumer sentiment can translate into increased spending, providing another boost to the market.

Market Valuations and Future Outlook

While prevailing thoughts may suggest that the bull market is aging and current valuations appear high, Paulsen argues that these perceptions may shift. If the narrative evolves toward a low-inflation and sluggish growth scenario, underlying supports could become genuinely favorable for the market. Paulsen’s conclusion is clear: investors should hold their positions and refrain from exiting the bull market until tangible signs of its exhaustion are evident.

Conclusion

In light of the indications laid out by Paulsen, stock bulls might find it prudent to remain invested as these five pillars of support strengthen in the market. With a balanced view of both optimistic and cautious perspectives, the potential for future gains remains substantial as long as these key factors align favorably.