'Incredible economic momentum' will drive stocks higher in Q4, Leuthold's Jim Paulsen says

The Leuthold Group's Jim Paulsen considers Wall Street pessimism overdone.

From the latest consumer confidence numbers to booming home sales, the firm's chief investment strategist believes Main Street is accurately reflecting an unprecedented rebound, and investors will soon take notice.

"A lot of good things happening here as we enter the fourth quarter," Paulsen told CNBC's "Trading Nation" on Wednesday. "The first one is just incredible economic momentum heading into this last quarter of the year."

Even though the third quarter was positive for the major indexes, September was a losing month. The S&P 500 fell by 4% while the Dow lost 3%. The tech-heavy Nasdaq dropped almost 5%.

He doubts September is a harbinger of the next three months.

Paulsen believes bullish Main Street activity will ultimately dominate current market worries over coronavirus case surges, the November presidential election and challenging seasonal influences.

"If you look at the consumer, they're buying big ticket items at an amazing pace," he said. 

When Wall Street and Main Street confidence levels have diverged historically, Paulsen contends it drives stocks higher.

"Since 1988, and when consumer confidence has been above average while investor confidence is below, you've had 20% annualized returns in the S&P 500," he said. "So, I think it's going to prove to be another good quarter."

His bottom line: Take advantage of Wall Street pessimism while you still can.

According to Paulsen, investors shouldn't delay putting new money to work and would be best served by targeting economically sensitive S&P groups.

"I would broaden out your bets away from technology and new era. I'd still own that," Paulsen said. "New leadership is going to be picked up by small caps, cyclicals, international stocks."

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