Tech still rules, but Paulsen says watch these three risks

Main US indexes rise; Nasdaq up >1.5%, S&P 500 up >1%

Tech leads S&P 500 sector gainers; just staples, energy slip

Euro STOXX 600 index advances ~0.9%

Dollar dips; US crude falls >1%; bitcoin rises; gold gains >2%

US 10-year Treasury yield falls to ~4.94%

Jim Paulsen, an economist and veteran Wall Street strategist who most recently served as chief investment strategist at The Leuthold Group, says technology stocks remain market leaders, but several emerging risks are creating "scratches" in the sector's otherwise durable track record.

Tech has dominated this bull market, outperforming over rolling six-month periods about 78% of the time. But, in a note out on Thursday, Paulsen highlights three concerns.

First, corporate cash reserves are no longer growing as quickly as spending on AI, digital infrastructure and other "new era" investments. Historically, he says tech has performed best when companies could fund innovation from cash on hand. Today, more spending is being financed with debt, a shift that has often preceded weaker tech leadership.

Second, Paulsen points to a little-followed indicator: the correlation between growth in innovation-related spending and overall GDP growth. Tech tends to outperform when new-era spending follows a different path than the broader economy, reflecting transformative investment rather than ordinary cyclical activity. That correlation reached a record low in late 2024, helping fuel tech's gains. But Paulsen argues that such extreme readings leave greater scope for reversal than further improvement, raising the risk that tech's edge fades if innovation spending begins moving more in line with broader economic growth.

Third, he finds that tech has historically delivered its strongest relative performance when Treasury yields are rising. If growth slows and yields decline, as he expects, that tailwind could weaken.