Jim Paulsen thinks investors should prepare for the year’s biggest event, but it’s probably not what most people are expecting.
The former chief investment strategist at The Leuthold Group revealed in a blog post this week that he doesn’t think the main event for markets in 2026 will have anything to do AI or elections.
Rather, he thinks it will center around a major vibe shift with regard to the piece of the economic puzzle the public is most obsessed with: inflation.
“I believe the most important investment event during 2026 will not be who wins the mid-terms, whether AI blossoms or busts, middle east hostilities, trade protectionism, or concentrated stock market returns,” Paulsen stated. “Rather, it will likely be a shift in the cultural economic obsession from inflation toward real growth.”
He added that the public’s current fixation on inflation is rare in the grand scheme of recent history. While it has been a primary point of focus for both investors and consumers since 2020, historically, there have only been two other periods where it has been a major economic concern—the post-World War II 1940s and the Great Inflation cycle that ran from 1965 to 1980.
While Wall Street and Main Street both remain focused inflation, Paulsen sees the trend shifting. The pivot is critical for investors because the country’s economic focus has severe implications for the stock market.
“The impact of cultural economic obsessions has proved significantly important for the stock market during the post-war era,” Paulsen noted. “Inflation obsessions have significantly ‘depressed’ equity results whereas during periods when the goal centers on ‘growth,’ the stock market has performed much more agreeably.”
Paulsen acknowledged the broader S&P 500 has performed well since 2020, despite consistent economic uncertainty and high inflationary concerns. But he added that this growth has been fueled primarily by a small group of companies and that outside of their success, the broader market’s performance hasn’t been so strong.
As he highlighted, the Russell 1000 value index and Russell 2000 small cap index have risen only 8.7% and 8.8%, respectively, on an annual basis since 2019. By contrast, the broader S&P 500 has risen 13.8% per year.
“Although new era stocks have prospered during the contemporary inflation obsession, much of the rest of the stock market has probably been held back by ongoing fears of problematic inflation,” Paulsen said.
While the strategist sees a shift coming, he also still thinks investors should be worried about climbing inflation in the coming months. Yet, ultimately, Paulsen maintains that the upcoming pivot from the inflation mindset will help move markets in a positive direction.
“Investors have much to consider, but in my view, a shift of the cultural mindset from being primarily worried about inflation to promoting real growth ‘trumps’ all,” he said.
