US Markets

Rising bond yields might not tank stocks, says Jim Paulsen. Here’s why

Paulsen: I'd love to see the Fed hike rates

Stocks may not be as vulnerable to rising bond yields as the market fears, Wells Capital Management's chief investment strategist, Jim Paulsen, said Friday.

Paulsen said he believes bond investors concerned about inflation have taken control of long-term rates from the Federal Reserve, pushing up the 10-year U.S. Treasury yield despite the central bank keeping its short-term benchmark rate target between 0.25 and 0.50 percent.

"You've got long-term bond vigilantes kind of leading the Fed again for the first time, not only here but globally, and that is going to bring more and more pressure on the Fed to start raising rates," he told CNBC's "Squawk on the Street."

The Fed has not lifted interest rates since guiding them from near zero to the current range in December.

Consequently, investors have piled into equities and riskier assets in a hunt for yield. But some market watchers worry that stocks have grown pricey, and a rise in rates could make them look less attractive in comparison to bonds.

Equities have been under pressure this week as the 10-year yield cracked 1.7 percent and investors await an interest rate decision from the Fed next week, though the market does not expect policymakers to hike.

However, Paulsen believes an improvement in corporate earnings, after six quarters of aggregate revenue declines for the S&P 500, could provide some protection for stocks against rising rates. Equities could rally for several months along with rising rates as better earnings make stock valuations more attractive, he said.

Also critical is whether investors view a rate increase as a sign the economy is improving and ultimately positive for stocks, Paulsen said. In his view, the equity rally since February, an improved commodities market and the rebound in yields provide some evidence global growth is picking up.

"There's a message coming out of the financial markets that this is more maybe fundamentally based than people appreciate," he said.

Watch Japan next week: Peter Boockvar

But Peter Boockvar, chief market analyst at the Lindsey Group, has said stock prices look "extraordinarily vulnerable" if long-term U.S. Treasury yields continue to move higher.

Boockvar said Friday that rising long-term rates around the globe are pulling U.S. rates higher, and so the Bank of Japan's "comprehensive assessment" of its monetary policy next week is more relevant than the Fed meeting.

"We should be watching long-term interest rates around the globe, particularly in Japan next week, and that is the biggest risk to the U.S. equity market because of the elevated valuations," he told CNBC's "Squawk Box."