The Leuthold Group's Jim Paulsen sees trouble lurking as investors embrace growing odds of another stimulus package.
Even though the long-time bull acknowledges massive aid has been necessary to steer the U.S. through the coronavirus crisis, he's worried too much spending will spark sharp inflation. In a recent note, Paulsen called it the "most significant risk beyond this year."
"What latent unintended consequences is it going to lead to? It could lead to more rapid inflation which would necessitate more rapid tightening," the firm's chief investment strategist told CNBC's "Trading Nation" on Tuesday. "It could lead to a loss in world confidence and U.S. government finances."
Paulsen, who oversees about $1 billion, notes it's ironic the one thing designed to help people navigate the pandemic may spark another serious recession.
"It's the overuse and abuse of economic policies around the globe for that matter — but specifically in the United States," said Paulsen.
For now, he's telling clients it's premature to take action against potential inflation. Paulsen acknowledges there are certain factors that could offset the impact such as aging demographics and tech-driven innovation.
"I would stay bullish this year. Stay invested. But you may want to think about increasing risks from latent policy prescriptions as we move towards the end of the year," Paulsen said. "It becomes a bigger risk as we get into 2022, '23 and '24."
Paulsen expects the S&P 500 to end this year at 4,100, which implies an 8% increase from Tuesday's close.