Analyst: U.S. Economy Faces Downside Risks in 2025, Could Trigger at Least a 10% Stock Market Correction

On December 31, it was reported that Jim Paulsen, Chief Investment Strategist at The Leuthold Group, released a new research report stating that despite widespread concerns about an overheating economy, the U.S. economy is more likely to experience a surprise slowdown in 2025, which could trigger at least a 10% correction in the stock market. According to the report, with current bond yields holding around 4.6%, the economic surprise index is expected to fall to -35 in the first quarter, with GDP growth slowing from the current 2.7% to below 2%.

Paulsen analyzed a number of warning signs, including a deteriorating financial conditions index, a relative decline in the number of rising stocks in the stock market, and weakness in cyclical stocks. He notes that in the past 18 months, two small declines in the Financial Conditions Index have triggered significant market corrections, including the October 2023 stock market pullback and the collective plunge of the tech “Big Seven.

Nonetheless, Paulsen believes the bull market is still on track to continue in 2025, but advises investors to increase their defensive allocations and keep a close eye on tech stocks. He emphasized that the likelihood and magnitude of a correction in U.S. equities would largely depend on the performance of popular tech stocks, and any slowdown in these stocks could pose systemic risks.