The market's tech boom points to a glaring division in the economy, a veteran strategist says

• Jim Paulsen says there's an worrying trend splitting the US economy.
• Tech has boomed, though the rest of the US economy isn't doing as well.
• The situation calls for policy support to boost growth and prevent an economic "bust," he warned.

The AI boom has become a tale of old versus new, in both markets and the economy, and one Wall Street veteran says it has some dire implications for the future if not addressed.

Jim Paulsen, the former chief strategist at the The Leuthold Group, said he sees an increasingly worrying trend that's spread through markets and the US economy. The tech sector — which Paulsen referred to as the "new era" economy — is booming, though the rest of the economy looks to be on the verge of a bust.

Paulsen has flagged the widening gap between high-flying tech stocks and the broader market in the past as a potential warning sign. The S&P 500 is up 28% over the past year. The index excluding technology is up 20% over the same period.

That disconnect extends to the broader economic picture, he said. In a Substack post on Monday, Paulsen pointed out how "new era" investment spending has accounted for around 28% of the real GDP growth rate since 2022, up from around a 15% share from 2020 to 2021.

Meanwhile, the "old era" economy — which accounts for 87% of GDP — is growing at an "uncomfortably sluggish pace," Paulsen said. He estimated that real GDP growth excluding the new era sector hovered just around 1% over the last six quarters.

The dynamic, which Paulsen referred to as "BustBooming" of the US economy, began decades ago, though the trend has recently started to accelerate.

"While this relatively small part of the US economy is booming, the rest of the economy is BUSTING," Paulsen wrote. "In some sense, similar to the US stock market, the US economy is increasingly suffering from a 'lack of breadth' problem," he added.

Paulsen, who previously said he believed most of the economy was already in recession, said he didn't expect the US to fall into an official downturn anytime soon. Still, the situation calls for rapid fiscal and monetary policy support to boost growth in areas of the economy that are struggling, he said, despite prominent concerns markets have about inflation.

"The bifurcation in the economy is getting worse fast and needs 'policy support' now," Paulsen wrote.

"Perhaps then the current 'BustBooming' nature of the US economy won't end with just a Bust," he later added.

Concerns about a potential recession have picked up since the Iran war began over two months ago, as surging oil prices have sparked fears of a new bout of inflation.

Markets, though, see the risk of tighter monetary policy as the Fed keeps an eye on inflation growth. The odds that the Fed will raise interest rates by the end of the year rose to 17% on Monday, up from 0% one week ago, according to the CME FedWatch tool.