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

According to Jim Paulsen, five key factors—the Fed funds rate, 10-year Treasury yield, CPI inflation, M2 money supply growth, and consumer confidence—could provide more support to the S&P 500 in the coming months, potentially driving further gains. Paulsen's analysis indicates that historically, the S&P 500 has performed significantly better when these factors are aligned positively, with average annualized gains of 16.3% since 1960; while inflation has been supportive, the other factors have been largely absent during the current bull market, suggesting considerable upside if they shift favorably.

Analysis

Veteran strategist Jim Paulsen posits that the current equity bull market, which has seen the S&P 500 remain resilient (currently 3.8% below its February 19 high) despite significant headwinds, could receive substantial further impetus from five key macroeconomic supports: the Fed funds rate, the 10-year Treasury yield, CPI inflation, M2 money supply growth, and U.S. consumer confidence. Historically, when all five factors align positively, the S&P 500 has delivered an average annualized gain of 16.3% since 1960. For instance, months with rising M2 money supply growth saw the S&P 500 appreciate at a 12.7% annualized pace, versus 2.2% when M2 growth slowed, and periods with Fed funds rate cuts yielded 10.5% greater S&P 500 gains than periods with rate hikes. Notably, during the current bull market that commenced in October 2022, most of these traditional supports have been notably absent or even contractionary; the Federal Reserve was tightening policy, M2 money supply growth has been exceptionally weak at an average annualized rate of 0.8% (with real M2 contracting at -2.2%), and the 10-year Treasury yield has not established a downward trend, remaining between 3.5% and 4.75%. Only CPI inflation, which has fallen from 7.75% in October 2022 to a current 2.3%, has consistently provided a tailwind. Paulsen anticipates these other supports could become more beneficial, particularly if a 'low inflation-sluggish growth' scenario materializes, arguing that such a shift would turn these currently underutilized pillars decidedly positive for equities, suggesting the bull market may have further to run before its supports are fully exhausted.

Key Decisions for Investors

• Investors should closely monitor the trajectory of the five key macroeconomic indicators identified by Paulsen – Fed funds rate, 10-year Treasury yields, CPI inflation, M2 money supply growth, and U.S. consumer confidence – as shifts in these could signal further market upside.
• Consider maintaining or strategically increasing equity exposure, given Paulsen's analysis that the bull market has persisted largely without several traditional supports, implying significant potential if these factors turn favorable.
• While Paulsen's outlook is optimistic about these internal market drivers, investors should remain vigilant regarding external risks, such as ongoing tariff developments and geopolitical factors, which could introduce volatility or alter the supportive narrative.