Another warning sign for stocks is rearing its head, Jim Paulsen says.
The Wall Street economist and former CIO of The Leuthold Group said he identified a concerning pattern in the US economy that suggests the market could be headed for rocky terrain. In a post on Substack, he pointed to the ratio of GDP that was attributable to the private sector over the public sector — a key reflection of economic growth that has declined over the past quarter.
Historically, the growth rate of the private sector has outpaced that of the public sector, but that pattern looks to have unwound over the last several months, largely due to increased government spending and sagging growth among private companies, Paulsen said.
Private real GDP rose 1% year-over-year in the first quarter of 2026, compared to the 4% year-over-year gain in public real GDP, he noted.
In the past, periods when public sector activity accounted for a larger percentage of growth than the private sector have been associated with times of weakness for the stock market.
That’s because federal spending took up a larger share of GDP in moments of economic vulnerability, such as during World War II, the years following the Great Financial Crisis, and during the COVID-19 pandemic.
The S&P 500 has generally declined in years when the ratio of private to public GDP contracted, such as in the early 2000s and the post-GFC years, per Paulsen’s analysis.
Jim Paulsen
“Perhaps, the first quarter decline in the private/public real GDP ratio is just temporary. I am concerned, however, that this may just be the first of several quarters when the private/public real GDP ratio declines,” Paulsen wrote, pointing to higher defense spending in the second quarter due to the Iran war.
The private sector also likely continued to slow in the second quarter, he said, pointing to restrictive factors like higher rates and energy prices.
“This could bring turbulence for the stock market,” Paulsen added.
Lately, the US economy has looked like it’s splitting into two. On the one hand, activity has remained sluggish in areas like housing and manufacturing; on the other, the AI trade is booming, largely due to investor enthusiasm, a wave of infrastructure spending, and support from the Trump administration.
The tech, energy, and industrials sectors — three areas of the market that have benefited from federal grants and partnerships — have posted the strongest year-to-date performance in the S&P 500, with tech stocks in particular climbing up 29% for the year.
Sectors like financials, health care, consumer discretionary, and communications have struggled, shedding between 1% and 7% since January, according to data from State Street Investment Management.
