Stocks just cleared their first record since August even as crude hovers near $100 a barrel, a setup that has some veterans tapping the brakes. Jim Paulsen, an industry voice who writes the Paulsen Perspectives newsletter, argues the combination of near 5% Treasury yields, pricey oil and a firmer dollar has not truly hit earnings or multiples yet. His read: investors feel fine today because blockbuster results and AI excitement are still doing the heavy lifting.
"We're going to have a good little gut check," he said. "Gravity may soon bring its undefeated reputation to both the economy and the stock market."
Paulsen says he has mapped the S&P 500 against an "economic and policy pressures" yardstick that blends three forces: the 10 year Treasury yield at a 50% weight, plus the US dollar and crude oil at 25% each. When that composite sat at today's elevated level in the past, he found the S&P 500 later fell by roughly 20% to 25%. He also notes that when the trio of higher yields, a stronger dollar and expensive oil all leaned on the index at once, the next three to five months often delivered declines up to 15% - a drop that could leave the benchmark negative on the calendar year, something not seen since 2022.
He does not see everything breaking at once. In his view, 7 of the index's 11 sectors have churned in trading ranges long enough that they can likely avoid a major downswing. Tech is the outlier in his view, where he expects a drop of about 20%. The "modest seven," as he puts it, "might well save our bacon."
Records and rising risks often arrive at the same time, which is the hard part. Market Briefs reads the market free every weekday.
Rising yields are already stressing parts of the market. Bank stocks are sitting in correction territory, and industrials briefly slipped there last month as higher borrowing costs and record diesel prices cooled activity. Financials are also feeling the heat from lofty yields, the prospect of additional rate hikes and worries about AI tools such as Meta's Muse reshaping parts of the business.
Ned Davis, senior advisor and co founder of Ned Davis Research, called the latest jump in rates a "threat to stocks and the economy, as debt and deficits need to be financed." Out of 10 daily measures he uses to flag major market turns, only three are flashing bullish right now. Among the negatives: a falling advance decline line, which tracks winners versus losers, a trend he says has been worsened by rising yields and has helped spark selling in financials.
Breadth tells a similar story. With the index near a record, only 43% of S&P 500 constituents are above their 200 day moving average, and an even smaller share sit above their 100 day and 50 day marks. Purpose Investments strategist Craig Basinger called that mix "extremely low and quite rare," and noted that, historically, price more often falls back to align with breadth instead of breadth rising to meet price.
Oil prices have hovered near $100 since conflict flared in the Middle East in March, yet some argue the economy and stocks may be handling higher rates better than expected. "Maybe the economy is just much less rate sensitive than we thought," wrote Stephanie Roth of Wolfe Research, where she is chief economist, pointing out that the index has held up even as the most rate exposed areas take the pain.
Paulsen's history lesson is less forgiving. Looking back to the 1970s, he says the hit from oil spikes typically shows up with a lag, and he thinks those pressures are now catching up. He expects a "rough patch" that could run "at least until early next year." For everyday investors, the message is simple enough to say out loud: stocks are near records, leadership is narrow, yields are lofty and oil is expensive. That cocktail has a habit of shifting where returns come from and making the ride bumpier, especially for parts of the market that live closest to rates and credit.
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