Wall Street veteran warns: Market ignores pressure signals, US stocks may face test

Notice that, no matter how optimistic Wall Street is about the economic outlook in the near term, the actual situation has generally exceeded their estimates, supporting the risk appetite that has been driving the stock market higher. However, this support may soon begin to wane. Renowned strategist Jim Paulsen's model shows that the sustained high oil prices and volatility in the bond market in recent months will soon start to drag down economic momentum. This is undoubtedly a hindrance for the S&P 500 index, which has gained $9 trillion in market value since late March. From a data point of view, the current Citi Economic Surprise Index, which measures the difference between actual data and consensus expectations, is at its highest level since 2023, seeming to signal that "all is well". However, Paulsen found a strong negative correlation between this index and a policy pressure index - meaning that changes in the policy pressure index often lead the economic surprise index by three months. This policy pressure index, which measures the impact of rising oil prices, 10-year US Treasury yields, and a strong US dollar, is currently approaching its highest level since the spring of 2025. In that year, President Donald Trump's trade war led to severe market turmoil. During an interview, Paulsen stated that the lagging effects of these rising economic pressures are expected to "slow down overall economic momentum in the United States" and put pressure on economic activities in the fall. "This might catch people off guard. After all, Wall Street professionals had just raised their target points to 8000 and 8500 points." Since mid-April, despite high oil prices, ongoing conflict in the Middle East, and signs of re-emerging inflation, traders have turned a blind eye to these factors and the S&P 500 index has continued to hit new all-time highs. Earlier this month, with the stronger-than-expected jobs report released on June 5, market expectations of a rate hike this year intensified, leading to a cooling of risk appetite. According to Paulsen's analysis, these factors pose a threat to the stock market trading at record highs. With forty years of experience on Wall Street, Paulsen has worked for Leuthold Group and Wells Fargo. Data shows that the negative correlation coefficient between the Citi Economic Surprise Index and the Policy Pressure Index is as high as 0.7 (1 indicates that the two move in complete opposite directions). Last week, Barclays and Goldman Sachs trading departments also expressed similar concerns, pointing out that due to crowded positions, narrow market breadth, and expectations of interest rates staying elevated for longer, the stock market is more prone to sudden pullbacks. Mark Marek, Chief Investment Officer of Muriel Siebert & Co., believes that investors have been distracted by dazzling tech stock performance and major events such as last week's SpaceX IPO, overlooking the increasing economic risks that threaten the upward trend of the stock market. He said, "Wall Street is focused on rockets launching, while the macro-level basement is already flooding." When the gap between actual economic data and Wall Street expectations narrows or becomes negative, it often slows down the stock market's upward trend. According to data compiled by Ned Davis Research, when the surprise index reading is above 22, the average return of the S&P 500 index over the next 12 months is 11%; when the reading is between 22 and -16, the return drops to 9.5%; and when the reading is below -16, the average return over the next 12 months is only 6.7%. With the announcement of a temporary peace agreement between the US and Iran, agreeing to reopen the Strait of Hormuz to end the Iran war, concerns about the impact of energy prices on the economy have eased. However, other risks still exist. Last week, traders had to face the Producer Price Index (PPI) hitting its fastest pace in over three years, and rising inflation in May as indicated by the Consumer Price Index (CPI). Similarly, earlier this month, as traders repriced inflation concerns and rising oil prices, US Treasury yields climbed above 4.55%. Brian Jacobson, Chief Economic Strategist at Annex Wealth Management, stated that this has had a significant impact on the market's heaviest-weighted sector - tech stocks. "For growth stocks, a large part of their value comes from the future, sometimes the distant future. If inflation and interest rates rise, then the value of this future growth is discounted," Jacobson said. More troubling data is expected to be released soon. Following the CPI release, the Core Personal Consumption Expenditures (PCE) Price Index, a preferred inflation gauge by the Federal Reserve, is estimated to show concerning performance. Gerald McDaniels of 22V Research stated, "This will mark the sixth consecutive month that inflation data falls into the bad to worse range." He expects the core PCE in May to rise by 25 basis points. Indeed, after the end of the first quarter earnings season, with accumulating concerning economic data, the S&P 500 index has shown signs of fatigue. Keith Lerner, Chief Investment Officer and Chief Market Strategist at Truist Advisory Services, wrote in a report to clients, "This selloff coincided with a steady rise in the 10-year Treasury yield, driven by better-than-expected employment reports and a hawkish reassessment of Fed policy prospects. The sharp pullback in tech stocks and lingering geopolitical uncertainty in the Middle East have further increased pressure." Certainly, key benchmark indices including the S&P 500 and Nasdaq 100 saw a sharp rebound on Thursday after the US and Iran announced an interim peace agreement and agreed to reopen the Strait of Hormuz to end the Iran war, causing oil prices to plummet. Previously, rising oil prices had been a major concern for inflation watchers. "Before being too optimistic about this, I would prefer to see the agreement officially signed," Jacobson of Annex Wealth said. Paulsen pointed out that even if oil prices have indeed peaked, the momentum of the economy and the stock market could still suffer. "Rising oil prices will harm the economy, but the real damage caused by this situation usually becomes apparent after oil prices have peaked. This is the case for both the market and the entire economy."