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Strategist Jim Paulsen sees a correction or 'a more challenging market' in 2018

  • There are a number of things "stacking up" that point to a bigger struggle for stocks next year, noted strategist Jim Paulsen told CNBC on Tuesday.
  • "I don't see the elements of a bear market but I certainly think 2018 can bring us a correction or at least just a more challenging market," he said.

    There are a number of things "stacking up" that point to a bigger struggle for stocks next year, noted strategist Jim Paulsen told CNBC on Tuesday.

    "I don't see the elements of a bear market but I certainly think 2018 can bring us a correction or at least just a more challenging market," the chief investment strategist at the Leuthold Group said in an interview with "Power Lunch."

    Paulsen has been largely bullish over the years but has become a bit more cautious lately.

    One of the things of note is "chronic surprises on the economy" that has been one of the big market catalysts, he said.

    "It's really feeling good. The problem is I think next year, even if it stays good, it will no longer surprise ... and if doesn't surprise, it won't impress and it won't be as positive for stocks," he said.

    Paulsen also thinks there will be more interest rate inflation pressure, coupled with the draining of liquidity from the market as the Federal Reserve unwinds its balance sheet.

    "The result of that will be a bigger struggle for stocks overall."

    He's not the only one with a warning about the stock market next year. Bank of America Merrill Lynch is predicting "capitulation" for the bull market in 2018.

    However, Goldman Sachs thinks stocks are in for a strong 2018 as long as Congress is able to pass tax reform.

    For his part, Paulsen likes international stocks, particularly emerging markets.

    While global markets will see rates rise, they won't increase as aggressively as they will in the U.S., he noted. Plus, he said there will be greater inflation in the U.S.

    He would take advantage of the positive sentiment toward growth and the negative sentiment toward value.

    One "great trade" would be to go from overweight to underweight technology, Paulsen said. He said he would look at the "beat up" and "out of favor" energy sector, which tends to be an inflation play.

    — CNBC's Jeff Cox contributed to this report.

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