Veteran strategist warns tech boom is widening a split in the US economy, urges swift policy support

A surging tech sector is increasingly outpacing the rest of the US economy, creating a divide that could tip into a "bust" without rapid policy support, according to veteran market strategist Jim Paulsen. The former chief strategist at the Leuthold Group said an AI-fueled "new era" economy is booming even as most other sectors lag.

Paulsen has warned before that the stock market’s gains are narrowing. Over the past year, the S&P 500 has risen 28%, he noted, while the index excluding technology is up 20%—a gap he sees as a cautionary signal. He says the same imbalance is now evident in the real economy.

In a Substack post on Monday, Paulsen wrote that "new era" investment spending has accounted for around 28% of the real GDP growth rate since 2022, up from roughly a 15% share in 2020-2021. By contrast, the "old era" economy—which he said represents 87% of GDP—is expanding at an "uncomfortably sluggish pace." He estimated that real GDP growth excluding the new era sector hovered around 1% over the last six quarters.

Paulsen described the dynamic as the "BustBooming" state of the economy, arguing that the US now suffers from a "lack of breadth" similar to what he sees in equities. "While this relatively small part of the US economy is booming, the rest of the economy is BUSTING," he wrote.

Although Paulsen has previously said he believed most of the economy was already in recession, he said he did not expect the US to fall into an official downturn anytime soon. Still, he argued the split requires rapid fiscal and monetary policy support to bolster weaker sectors despite market concerns about inflation.

"The bifurcation in the economy is getting worse fast and needs 'policy support' now," he wrote, adding that such action could help ensure the current "BustBooming" period does not end "with just a Bust." Broader recession worries have picked up since the Iran war began over two months ago, as higher oil prices have revived fears of another bout of inflation.

Markets see the risk of tighter monetary policy as the Federal Reserve monitors price pressures. The probability that the Fed will raise interest rates by the end of the year rose to 17% on Monday, up from 0% one week earlier, according to the CME FedWatch tool.