A market vet says 4 sources of 'untapped potential' will keep stocks' record-setting rally going

• Stocks are trading near record highs and one Wall Street veteran says the rally has room to run.
• Jim Paulsen lists the "untapped" sources of support that could send stocks higher.
• He flags valuation and earnings opportunities, as well as high liquidity and unemployment, as drivers.

Stocks are back at record highs as the bull market nears the four-year mark, yet a veteran strategist said the rally has further to climb.

The S&P 500 and the Nasdaq Composite just set fresh all time highs as investors look past the Iran war. Jim Paulsen, a strategist with decades of experience on Wall Street, said the bull market has further to run, flagging several "untapped" sources of upside support.

"It's healthy to always be asking how much is left in the bull's tank? But my guess is there is still considerable capacity left in the contemporary bull market," the strategist said.

Not only is the S&P trading at all-time highs, but Paulsen also noted that valuations have become concerningly high while profit margins are also near record highs.

"Currently, the S&P 500 Index trades at a very high PE multiple with record-setting earnings and profit margins." Paulsen wrote.

He noted, "However, much of the global stock market is more reasonably priced and has plenty of untapped potential which could continue to surprisingly drive this bull market higher."

Here are four of the "untapped" rally supports Paulsen sees fueling further gains:

Overlooked valuation opportunities within the stretched S&P 500

Despite the sky-high valuation of the S&P 500, there are valuation opportunities within its subsectors.

"Although the S&P 500 valuation profile appears increasingly stretched, most of the rest of the stock market remains more attractive from a valuation perspective," the strategist wrote.

Large-cap tech has led the bull market, with standout performers like Nvidia. The extremely narrow leadership leaves many sectors and stocks "reasonably priced," Paulsen said.

He flagged small- and mid-cap stocks, as well as international equities, as pockets of opportunity.

Earnings potential persists for most of the market

Like valuations, earnings expansion has been narrow, leaving room for growth among non-tech laggards that could carry the rally further.

Tech has dominated earnings growth, leaving companies in other sectors of the economy behind.

"Although the bull is nearing its fourth birthday, much of the economy still has considerable profit potential," Paulsen said.

"Surprisingly, despite the bull market approaching its 4^th birthday, profit capacity likely remains far more favorable and youthful than widely perceived," he added.

Cash on the sidelines offers further liquidity potential

The US economy has a large amount of cash sitting on the sidelines that could be invested. Paulsen said this is yet another support to fuel a continued rally.

"The U.S. economy has amazing amounts of excess dry powder floating about the private sector just waiting to be employed in some opportunity," he wrote.

Paulsen outlined that private-sector cash holdings as a percent of economic activity are nearly 80%, compared to pre-pandemic levels that rarely exceeded 60%.

"I find it hard to get too bearish about the prospects for the stock market when 80% of annual U.S. economic activity is being held in cash — just waiting to find a home!"

An attractive setup in the labor market

The labor market is in a "unique" position that could pay off for investors.

Unemployment has risen in recent years during economic expansion.

Paulsen outlined that this dynamic positions the stock market for gains driven by a drop in unemployment.

"Declines in the unemployment rate have historically been positively correlated with solid stock market performance. Is the U.S. again about to "untap" excess labor market capacity?," he said.