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Strategist Jim Paulsen, who's been concerned, warns that market challenges are 'coming home to roost'

  • The challenges facing the stock market are "coming home to roost," says widely followed strategist Jim Paulsen.
  • The Dow Jones industrial briefly plunged nearly 1,600 points on Monday before ultimately ending the day down 1,175.21 points.

The challenges facing the stock market are "coming home to roost," said widely followed strategist Jim Paulsen, who has been recently raising a red flag.

The Dow Jones industrial average briefly plunged nearly 1,600 points Monday afternoon, and then cut that drop in half just minutes later, before ending the day 1,175 points lower.

"The markets are changing their valuation, if you will, for an economy that will be growing now at full employment and will now start to suffer from cost-push pressures — wage and interest rate both labor and capital cost increases — and probably inflation that's 3 percent or more," Paulsen, chief investment strategist at The Leuthold Group, told CNBC's "Closing Bell," shortly after the end of trading.

He added, "This is part of the process of getting to a more supportable valuation for the new character of this synchronized global recovery."

Paulsen has been raising the alarm on market sentiment that he believes is too bullish, calling stocks significantly overvalued and predicting the possibility of a 15 percent correction.

Liz Ann Sonders, chief investment strategist at Charles Schwab, told "Closing Bell" there has been an important shift in the market thanks to the Federal Reserve's tighter monetary policy.

The central bank's infusion of liquidity had been the story behind the success of the bull market, she said.

"It doesn't necessarily mean the bull market comes to a crashing end but it does mean we've probably ushered in a higher level of volatility and more sensitivity to what growth means for inflation," she said. "That also causes a re-rating of valuations."

What Paulsen was impressed with Monday was that the "panic" in the stock market didn't send investors rushing into bonds, as would normally happen.

"I don't know if that means we have to hit it harder to bring that panic or if it means the markets are repricing and have a firm stand that inflation is indeed picking up," he said.

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