Stock market has used up a lot of capacity, says economist Jim Paulsen

Summary

Jim Paulsen argues the stock market has used up much of its capacity and looks vulnerable, citing extreme valuations, earnings, margins, and complacent sentiment. He expects slowing economic momentum to reduce inflation fears but increase recession fears, potentially causing lower rates to coincide with falling stock prices. He also downplays the bond vigilante narrative, saying long-term Treasury yields remain rangebound.

• S&P 500 price and trailing earnings are about 60% above trend.
• Earnings estimates, profit margins, and investment spending are near records.
• Household equity holdings are at record highs while cash buffers are near record lows.
• Consumer and labor market momentum indicators are slowing.
• Lower rates may not support stocks if recession fears rise.
• Long-term Treasury yields are still in their multi-year range, not confirming a bond vigilante selloff.