A stock-market correction is likely in the near term but it will set up the next leg of the bull run, Jim Paulsen says

• Jim Paulsen, the chief investment strategist of the Leuthold Group, sees a near-term stock correction as likley.
• Paulsen believes the correction, along with rising earnings, will set up the next leg of the bull run.
• The strategist noted that the market has seen similar corrections in the past, followed by bull rallies.
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Jim Paulsen, the chief investment strategist of the Leuthold Group, said in an interview on Thursday that he believes the market will experience a correction soon, but the fall will set up the next leg of the bull run amid record earnings growth.

"I think we could be flattish, with a correction in the middle, and then earnings are a whole lot higher, and it sets up the next leg (of the bull market)," Paulsen said.

Paulsen told CNBC that he expects there could be a correction of around 10%-15% in the near term, based on similar corrections in bull markets of the past.

The strategist noted that the S&P 500 currently trades at roughly 30x trailing earnings, which is historically high.

However, if there is a mild correction, coupled with strong earnings growth, it could bring the S&P 500's earnings multiple down to just 18x, setting up the next leg of the bull run.

At 18x earnings, "it'll be suddenly an undervalued market," Paulsen said, adding that at that level, the market will trade below the average multiple since 1990.

The Leuthold Group strategist said this "re-valuation period" the market is headed for is a "good thing."

"We had re-valuation periods mid-83' to mid-84', mid-93' to 94', 2004 to 2005, 2009 to 2010, all of them occurred about a year into the fresh bull market," Paulsen said.

He went on to explain that after each "revaluation period," the S&P 500 recovered to trade well above where it had before the fall.

Paulsen was also asked about inflation in the interview.

The strategist said he believes inflation could be higher in the near term amid the bust to boom cycle brought about by the pandemic, but in the long run, he believes "deflationary forces are likely to prevail."