Key Takeaways:
Jim Paulsen's policy pressure index — tracking oil, 10-year yields and the dollar — has reached levels last seen during the spring 2025 trade war, with a three-month lagged correlation suggesting economic data may weaken by autumn.
A policy pressure index tracking crude oil, 10-year Treasury yields and the dollar has climbed to its highest since the spring 2025 trade-war turmoil, veteran strategist Jim Paulsen said, warning the lagged effect could hit the US economy by autumn.
"This will catch some people off guard," Paulsen, a four-decade market veteran formerly at Leuthold Group and Wells Capital Management, said in a phone interview. "We just went through a phase where Wall Street rushed to raise S&P 500 targets to 8,000 and 8,500."
The index, which Paulsen constructed to measure the combined pressure from elevated oil prices, rising bond yields and a stronger dollar, shows a negative correlation of 0.7 with the Citi Economic Surprise Index — with the policy measure leading by roughly three months. The 10-year yield breached 4.55% this month after May producer prices rose at the fastest pace in more than three years and the consumer price index also accelerated. Crude oil fell 5.7% to around $80 a barrel after Trump signaled a final Iran peace deal was near, though Paulsen cautioned that the economic damage from high energy prices typically peaks after oil tops out.
If the lagged relationship holds, the current elevated policy pressure could begin weighing on economic data through the third quarter, challenging the bullish consensus that has driven the S&P 500 to repeated records. The index has added roughly $9 trillion in market value since late March, even as inflation prints have consistently surprised to the upside. Gerard MacDonell of 22V Research expects May core PCE to rise 25 basis points — what he called the sixth consecutive month of deviation-to-bad inflation data.
Inflation Persists as Rate-Cut Bets Fade
The resilience of price pressures has forced a sharp repricing of Federal Reserve expectations. Stronger-than-expected June nonfarm payrolls data on June 5 reignited speculation that the Fed could raise rates this year, sending risk appetite lower. Brian Jacobsen, chief economic strategist at Annex Wealth Management, said growth stocks are most exposed: "A large portion of their value comes from the future, sometimes the distant future. When inflation rises and rates go up, the present value of that future growth shrinks significantly."
Truist Advisory Services chief investment officer Keith Lerner wrote in a client note that the recent selloff in technology stocks coincided with the 10-year yield's sustained climb, compounded by Middle East uncertainty. The tech-heavy Nasdaq 100 has come under pressure as higher discount rates compress valuations on long-duration equities.
Iran Deal Offers Relief, but Risks Remain
Trump's announcement that final terms of a US-Iran peace agreement are close to signing triggered a sharp rally in equities and a drop in oil prices this week. The S&P 500 and Nasdaq 100 both rebounded as energy costs — a key driver of inflation fears — retreated.
Yet analysts urged caution. "I won't get too optimistic until the ink is dry," Jacobsen said. Paulsen echoed the view, arguing that even if oil has peaked, the economic drag is already in motion. "When oil goes up, the economy gets hurt, but the real damage typically shows up after prices peak — for both the market and the economy," he said.
Mark Malek, chief investment officer at Muriel Siebert & Co., offered a stark analogy: "Wall Street is staring at a rocket launch while the macro basement is flooding." He said investors are fixated on high-profile tech earnings and the SpaceX IPO, overlooking the economic risks accumulating beneath the surface.
The Citi Economic Surprise Index currently sits at its highest since 2023, which Paulsen said creates a false sense of security. The metric measures how economic data has performed relative to expectations — not where it is headed. Ned Davis Research data shows that when the surprise index is above 22, the S&P 500 has averaged an 11% gain over the following 12 months. When it falls below minus 16, that return shrinks to 6.7%. A sustained deterioration in actual data would remove a key pillar supporting equity valuations.
Barclays and Goldman Sachs trading desks have issued similar warnings in recent days, flagging crowded positioning, narrow market breadth and the risk of a sharp correction as the "higher for longer" rate narrative regains traction.
This article is for informational purposes only and does not constitute investment advice.
