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Trade war's 'wall of worry' will spark a rally, Wall Street bull Jim Paulsen says

'We could have a heck of a nice second half,' Wall Street bull Jim Paulsen says

Wall Street bull Jim Paulsen is taking a contrarian approach to the U.S.-China trade war's impact on the market.

Paulsen, the Leuthold Group's chief investment strategist, predicts a more bullish environment for stocks as long as tariffs don't go on indefinitely.

"It's re-raised a wall of worry again which has intensified with just a mild pullback in the stock market here," he told CNBC's "Trading Nation" on Monday. "It's also lowered P/E valuations on both forward and trailing multiples, refreshing the values a bit."

His silver lining includes the notion that it's also encouraging policy support in the form of lowering Treasury yields and fiscal stimulus that encourages future market gains.

"The thing to do is to bet on the policy cavalry winning," said Paulsen. "We could have a heck of a nice second half."

Much of his optimism also hinges on the state of the U.S. economy. He said a "Goldilocks" story is unfolding — noting that real economic growth has slowed while inflation and interest rates have moderated.

"In 2018, the economy was overheating," he said. "The fact that we paused growth is probably the best thing we could do. It has probably elongated both the recovery and the bull market."

He believes once the Street realizes the trade war will indeed end and the economy is growing at a healthy pace, the S&P 500 will rally as much as 15%.

According to Paulsen, groups that have been sensitive to the trade war should help lead the new push higher. He particularly likes technology, communication services and consumer discretionary.

However, he acknowledges improving economic growth and fewer fears related to the trade war could also spur the Federal Reserve to raise interest rates rather than cut them. And, that's a wild card to watch.

"There will be optimism that will more than overcome rate hikes," Paulsen said. "Eventually, higher rates may get us. But I don't think they will while the Fed first starts. I'd be more concerned about a rate cut because I think that would escalate recession fears right now."

The trade war's 'wall of worry' is setting the stage for a rally: Jim Paulsen