A stock correction looms as recession fears will resurface in 2025, Wall Street strategist Jim Paulsen says

• Jim Paulsen says he expects a 10%-15% stock market correction next year.
• The market veteran thinks investors are overlooking the risk of an economic slowdown.
• As economic momentum wavers next year, recession fear will trigger a market pullback.

A stock market correction could be sparked by something investors aren't thinking too hard about — a recession in 2025.

That's according to Wall Street veteran Jim Paulsen, who said this week that macro optimism is obscuring the possibility that blowout economic growth could waver next year, rekindling dormant recession fears.

"I think that we might eke out another positive year in the overall market, but I think it's going to be a lot bumper to ride here in 2025 and I think we're due for a correction, probably, maybe in the first half," he said in an interview with CNBC.

Between a 3% fourth-quarter GDP print and a Federal Reserve turning slightly more hawkish while still anticipating further rate cuts next year, investors appear set for further strength.

But in Paulsen's view, a combination of tightening forces will be a source of weakness in the market.

He noted that interest rate policy is restrictive enough to constrain growth in the first half of the year, despite recent rate cuts. Meanwhile, US money growth is insufficient to match the nominal GDP rate. Typically, that means the real GDP will decelerate by close to a percentage point in the following year, he said.

"I think that's going to reignite recession fears, even though I don't think we're going to have a recession, but I think we're going to be worried about it again. And with that, I think we could get a correction in the stock market," Paulsen said.

The market could drop 10%-15%, he forecast, and the correction could take awhile to pan out.

However, the fallout won't end the stock market's blockbuster bull run, but should provide investors with a buying opportunity. With both the household and corporate sectors maintaining strong balance sheets, it's unlikely the US would tip into recession, Paulsen explained.

He suggested that investors can prepare for possible market jitters by lightening up on equity winners, such as popular technology stocks. More exposure should be given to defensive sector stocks, such as high-dividend yielding names and low-volatility equities in the S&P 500.

"If the market keeps running all year, you're going to participate, but if it does pull back, you're in a position then where you can go back and pick up some stuff with fear and at much better prices and re-establish more of an aggressive position," he said.

Paulsen isn't the only market expert bracing for a correction. Others, such as Wharton professor Jeremy Siegel, expect that indexes are due for a brief pullback sometime in 2025.