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Jim Paulsen: 10-year yields will hit 3.5% this year

The stock market will continue its march higher and won't top out until bond yields go back over 3 percent, Wells Capital Management's Jim Paulsen told CNBC Friday. However, he thinks those higher yields will come sooner than many think.

"I really think the 10-year yield is going to make its way above 3.5 percent before the year's out," Paulsen said in an interview with "Street Signs."

"I think I'd stick with stocks until we get some more rate pressure in the system," he added.

Read More Cashin: Bond bounce may signal stronger economy

Jim Paulsen, Chief Investment Strategist, Wells Capital Management
Adam Jeffery | CNBC
Jim Paulsen, Chief Investment Strategist, Wells Capital Management

The S&P 500 hit a new intraday high Friday, and Paulsen thinks the index could reach 2,000 before possibly correcting under rate pressure later in the year.

"The undertow of this economy is far better than people think, and I think it's going to become more obvious as the year progresses," he said. That could mean "another ugly year yet in bonds."

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Right now, Paulsen's favorite investment play is in emerging market stocks, which "bottomed pretty hard in early March." Since that time, they have been significantly outperforming the U.S. and other developed markets, he said.

While emerging market stocks are not very popular at the moment, he said, if they continue to outperform "there could be a lot of cash coming in behind you."

Read More Jeremy Siegel: Here's what will send yields higher

By CNBC's Michelle Fox

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