The Leuthold Group's Jim Paulsen expects stocks to rally higher into record territory due to stronger economic and earnings growth.
But his bullish forecast comes with a warning — and it has nothing to do with the coronavirus outbreak.
"If we [economy] continue to grow, you're going to see consumer prices, wages, commodity prices — cost in general — start to pressure business operations, household budgets and ultimately, the valuations of the stock market," the firm's chief investment strategist told CNBC's "Trading Nation" on Wednesday.
Even though he doesn't have a timeline on when the economy could get squeezed, Paulsen calls the scenario the market's "primary risk."
"That could happen quickly if economic growth spurts much more than anyone is thinking this year or it could drag out over a few years," he said.
Despite the risk, Paulsen isn't ready to abandon his bullish stance.
"Inflation is not a problem. So, until there's some pressure, I think you've got to stay fairly bullishly tilted here," he said. "Even though we're going to have pullbacks, I think the economy is going to pick up. That may bring some pressures, but we certainly don't have them yet."
He lists the ISM manufacturing pickup, low unemployment, strong consumer confidence and positive factory order data to support his near-term optimism.
"Bond yields are really low. They haven't even been climbing. The Fed has been easing. The money supplies are growing with quantitative easing. Fiscal juice is expanding relative to GDP. Foreign policy officials are doing the same thing," he said.
Paulsen, who correctly positioned for a market breakout at the end of last year, also cites earnings as a bullish driver.
"Earnings season has been pretty good here for the fourth quarter overall," added Paulsen.
Yet, he's not ignoring the coronavirus outbreak's economic and business impact. Paulsen is watching the developments closely, but he suggests there's no evidence the fallout will extend beyond this quarter.
"It could get really serious," Paulsen said. "But I think the right thing to do there is diversify. Everyone should be diversified. And beyond that, I don't think you do much with it."