Excess Returns – It’s Not K-Shaped. It’s No Shaped | Jim Paulsen on What You're Getting Wrong About 2026

Date: January 6, 2026
Guests: Jim Paulsen with hosts Jack Forehand, Justin Carbonneau, and Matt Zeigler
Main Topics: Current state of the US economy, the “No Shaped” economy concept, market performance, Federal Reserve policy, sector allocation strategies, and the outlook for technology (New Era) stocks versus traditional sectors.

Episode Overview

This episode marks the launch of a new monthly series featuring renowned macro strategist Jim Paulsen. The discussion dives into the real state of the economy heading into 2026, challenging common narratives about economic growth and market expectations. Paulsen introduces his “No Shaped” economy analogy, explores why GDP data may be deceiving, analyzes the implications of monetary policy shifts, and provides a comprehensive look at how investors might strategically position portfolios for the year ahead. The conversation emphasizes critical thinking, challenging consensus and headline interpretations while offering a roadmap for navigating an environment full of contradictions.

Key Discussion Points & Insights

1. Questioning the Economic Narrative: Is Growth as Strong as it Seems?

[03:22 – 14:28]

• Headline GDP Numbers Are Misleading:
  • Paulsen explains that recent strong GDP prints are largely distorted by volatile trade numbers, mainly due to tariff-related activity since the Trump era.
  • “If you take trade out, the third quarter real GDP drops from 4.3% to only 2.4%. Year-to-date it falls from 2.5% to 1.8%... Over my history in the business, 2% growth would often be considered the stall speed of the economy.” (Jim Paulsen, 05:03)
• Labor Market Weakness is Being Overlooked:
  • Slow payroll growth, rising unemployment, and record duration for unemployment signal economic strain.
  • “Year-to-date nonfarm payroll through November is up 0.10%. By any historic definition that’s recession. It’s a complete stalling of the jobs creation market.” (Jim Paulsen, 08:09)
• Real Consumer and Industrial Activity is Flat or Falling:
  • Real retail sales have flatlined for nearly three years.
  • Manufacturing PMI and industrial production are in contraction territory.
• Conclusion:
  • Despite no clear excesses in leverage or liquidity, the broad economy is sluggish and risks further softening as the lagged impacts of past monetary tightening continue.

2. The “No Shaped” Economy: Rethinking Market Leadership

[15:40 – 23:26]

• Beyond the “K-Shape”:
  • Paulsen argues it’s not simply a divide between the rich and poor, but between "New Era" (innovation/tech) and "Old Era" (traditional industries) sectors.
  • “A lot of people say it’s a K-shaped economy, the difference between wealthy and poor. I think it’s a no shaped economy, the difference between new era and old era.” (Jim Paulsen, 15:09)
• Market Gains Are Concentrated:
  • Most of the bull market has been in the “New Era” (tech, innovation) stocks, masking weakness everywhere else.
  • The rest of the economy has “just laid there in the muck,” while the New Era has “done extraordinarily.”
• Policy’s Role:
  • Tight monetary policy has suppressed the “Old Era,” but as policies begin to ease, broader market and economic participation could resume.

3. A Bull Market with Bear Market Underpinnings?

[23:27 – 29:13]

• Contradictory Signals:
  • “We're at an all-time record high in the stock market, but with unemployment up, cash levels are huge, and even gold (the ultimate fear asset) is strong. There’s a lot of weird things going on.” (Jim Paulsen, 24:00)
• Cautious Optimism:
  • While tech leadership may slow, there is “a lot of room left over in much of the economy” for a catch-up rally.
  • The setup feels more akin to the bottom of a bear market than a bull market peak – a rare and confusing “tightrope” for investors.

4. Policy Outlook: The Case for More Easing

[29:13 – 35:06]

• Consensus Underpricing Fed Easing:
  • The general market expects a limited number of rate cuts.
  • “I think we’re just getting warmed up [with rate cuts]... I think the 10-year Treasury is going to get closer to 3% by the end of this year.” (Jim Paulsen, 31:09)
• Transition in Fed Focus:
  • The Fed’s attention is shifting from inflation control to supporting the labor market. A weakening jobs market may accelerate this transition.
  • “You just can’t have a job market that’s completely flatlined and not respond, and be tightening.” (Jim Paulsen, 34:50)

5. Technology (New Era) Warning Signs

[35:06 – 44:57]

• Liquidity, R&D, and Relative Underperformance:
  • Historically, tech outperforms when corporate cash and R&D rise; both are now falling.
  • “Tech seems to run on excess cash. When that cash starts to dry up, it tends to hurt the technology sector more than most.” (Jim Paulsen, 36:54)
• Relative Performance Plateau:
  • For the past 18 months, tech’s outperformance has stalled versus the S&P 500.
  • “If tech underperforms this quarter... Suddenly it could become a loser for almost two years. That would really get people to question their allocation.” (Jim Paulsen, 39:52)
• Implication:
  • Tech’s dominance, already priced for perfection and widely owned, is vulnerable if broader economic participation revives.

6. AI and Market Rotation Potential

[44:57 – 46:44]

• The Future of AI:
  • AI optimism could take longer to materialize meaningfully; “We tend to get a little over the top on some of the possibilities.” (Jim Paulsen, 45:36)
• Market Rotation:
  • As AI and New Era stock returns moderate, value, small caps, and international may stand to benefit.

7. Portfolio Allocation Outlook for 2026

[46:44 – 56:43]

• Equities Over Bonds, but With Nuance:
  • Overweight equities, with increased (but still underweight versus traditional balance) bond exposure as yields are expected to fall.
  • “In a year like that where bond yields come down... it makes sense to have more bonds than you maybe have had in the last couple years.” (Jim Paulsen, 48:27)
• Underweight Commodities, Especially Gold:
  • Gold’s run is seen as a “massive emotional blow off.” Commodities could lag in H1 2026, may rally later if the cycle strengthens.
• Within Equities:
  • Underweight “New Era” (tech/comm) sectors but not to zero; favor “broad market” plays including small caps, microcaps, cyclicals (consumer discretionary, industrials, financials), and especially international—emerging and frontier markets over developed, and developed over U.S.
  • Underweight China, overweight supply-chain-diversifying markets.
  • Avoid defensives like low-vol, consumer staples, REITs, healthcare for now.

Notable Quotes & Memorable Moments

• On the GDP Illusion:
  “If you take trade out, the third quarter real GDP drops from 4.3% to only 2.4%. Year-to-date it falls from 2.5% to 1.8%.” (Jim Paulsen, 05:03)

• On Labor Market Oddities:
  “Year-to-date nonfarm payroll through November is up 0.10%. By any historic definition that’s recession.” (Jim Paulsen, 08:09)

• On the “No-Shaped” Economy:
  “It’s not a K-shaped economy, the difference between wealthy and poor. I think it’s a no shaped economy, the difference between New Era and Old Era.” (Jim Paulsen, 15:09)

• On Contradictions:
  “We’re at a record high in the stock market... with the greatest fear asset ever known to man also at a bull market. How does that jive?” (Jim Paulsen, 24:47)

• On Tech Risks:
  “Tech seems to run on excess cash… when that cash starts to dry up, it tends to hurt the technology sector more than most.” (Jim Paulsen, 36:54)

• On Portfolio Strategy:
  “I would look to underweight my new era positions... to put some in what you could call old era areas, I just call broad market areas.” (Jim Paulsen, 52:29)

Timestamps for Key Segments

• GDP and Economic Health Discrepancy – [03:22 – 14:28]
• “No Shaped” Economy vs the K-Shaped Narrative – [15:40 – 23:26]
• Market Contradictions & Policy Lag Effects – [23:27 – 29:13]
• Federal Reserve: Easing and Market Response – [29:13 – 35:06]
• Tech Sector Warning Signs & Portfolio Implications – [35:06 – 44:57]
• AI, Sector Rotation, and Value’s Opportunity – [44:57 – 46:44]
• Jim Paulsen’s 2026 Asset Allocation Framework – [46:44 – 56:43]

Takeaway: Navigating a Contradictory Landscape

Jim Paulsen’s approach is rooted in questioning consensus and dissecting beneath the headline numbers. He argues the U.S. is not booming as GDP might suggest, but muddling through a bifurcated, policy-distorted stretch in which the much-despised bull market continues only thanks to an “all stars” roster of New Era giants. Investors should prepare for a regime shift: more widespread equity participation as easing continues and relative value emerges in forgotten corners of the market.

Action Point:
Position portfolios for broadening participation—tilting away from crowd-loved tech; seeking underappreciated, policy-sensitive cyclical, and international opportunities; preparing for a world where lagged policy support finally works through the system.