LIVE MARKETS-US economic growth slowdown could surprise markets, strategist warns

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U.S. ECONOMIC GROWTH SLOWDOWN COULD SURPRISE MARKETS, STRATEGIST WARNS

Retired strategist Jim Paulsen believes there are mounting signs that the U.S. economy is headed for a period of slower economic growth.

Although Paulsen, an economist and seasoned Wall Street watcher who most recently worked as chief investment strategist at Leuthold Group, thinks a recession in 2025 seems unlikely, he, nonetheless, says that if real GDP growth slows from its current pace of 2.7% to 2% or less next year – recession fears are likely to build and profit forecasts will probably be revised lower.

"Since most currently believe the economy is healthy, if not too strong, any meaningful slowdown will come as a surprise. And a 'surprising slowdown' which heightens fears could pause the stock market run if not possibly produce a 10% to 15% correction," writes Paulsen in his latest Paulsen's Perspectives note.

In his view, corrections are very difficult to accurately call, and most should stay invested in any case. However, he thinks a "small tilt away from cyclicality and other traditionally aggressive investments toward more defensive investments" may make sense. That said, if a correction does materialize, he says investors can then reposition more aggressively anticipating the reemergence of an ongoing bull run.

In terms of the likelihood, and magnitude, of a correction, Paulsen believes it may hinge on how New Era or tech darlings perform in 2025.

According to Paulsen, during the last four years, tech's relative return has been closely correlated to U.S. financial conditions, and in the past, worsening financial conditions have caused tech to underperform and brought selling pressures to bear on the overall market.

Therefore to him, "the primary question for investors in 2025 may be how much will financial conditions deteriorate as the economy slows next year, and how much will this impact technology stocks?"

(Terence Gabriel)

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