Closely watched strategist Jim Paulsen sees two scenarios playing out in markets this year — and both involve Fed rate hikes.
In the first, concerns about global growth persist, but the Fed is forced to raise rates this year because of inflation in wages and core prices.
"Yesterday's unemployment claims number, another strong job report, if that continues, those wage numbers are going to go up," the chief investment strategist at Wells Capital Management told CNBC's "Squawk Box" on Friday.
Minutes from the March meeting of the Fed's policymaking committee showed the members debated an April rate hike but concluded overseas pressure warranted caution.
In a more positive and equally likely scenario, Paulsen sees global growth picking up, allowing the Fed to raise rates into economic strength. Under those conditions, stock markets could rise.
Paulsen said already he sees signs that this is happening.
"If you look at economic surprise indices, they're rising in the last few months almost everywhere except Japan," he said. "Euro zone, the emerging markets, China, Great Britain, here, Canada."
On Thursday, Fed Chair Janet Yellen touted the strength of the U.S. economy and said she sees "substantial" progress toward the central bank's labor market goals and 2 percent inflation target.
The Fed has recently indicated that it plans two interest rate hikes this year, half its projection in December, when it raised rates for the first time in more than nine years. In cutting their expectations for the number of rate increases, policymakers cited concerns about weakness abroad.
The Consumer Price Index, excluding volatile food and energy costs, rose more than expected in February. So-called core CPI rose 2.3 percent in the 12 months to February.
In a third, but low-probability scenario, Paulsen said the U.S. economy rolls over and the Fed is pushed to the sidelines and deemed "useless," leaving fiscal policy as the only savior.
In the near term, stock valuations look high and investors are getting mixed messages as full employment butts up against the prospect of rising interest rates, Paulsen said. In that environment, the market is likely to bounce around a lot, but not go very far, he concluded.