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Stocks may rally longer than even the most bullish predictions, strategist Jim Paulsen says

After years of pessimism since the 2008 financial crisis, an explosion of confidence on Wall Street could propel the stock market higher for longer, even in the face of higher interest rates, closely followed market strategist Jim Paulsen told CNBC on Wednesday.

A series of positive developments — including stronger economic growth, prospects for better earnings and a pro-business agenda from President-elect Donald Trump — could push stocks "higher than we think," the chief investment strategist at Wells Capital Management said on "Squawk Box."

Paulsen said the S&P 500 could top 2,450 next year, even as the 10-year Treasury yield pushes toward 3.5 percent. While there may be some small pullbacks along the way up, he sees the greatest risk for a downturn coming later in 2017 from higher levels.

An S&P 500 level of 2,450 would represent about an 8 percent gain from Tuesday's record-high close. The index has jumped about 6 percent since Election Day on hopes that Trump's plans to cut taxes and reduce business regulations will shift the economy into a higher gear. The Dow Jones industrial average, meanwhile, has been flirting with the 20,000 level, although it was losing ground ahead of Wednesday's trading.

A second rate hike by the Federal Reserve in a decade, which is widely expected to come Wednesday afternoon at the conclusion of the central bank's December policy meeting, should actually spur more confidence, Paulsen said, arguing a nod toward further normalization of rates would be an acknowledgement of the economy's improvement.

But Paulsen said the Fed is actually "moving to the sidelines" on dictating the level of rates. The bond market is now driving the bus, he added. This week, the 10-year yield topped 2.5 percent for the first time in more than two years.

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