A Wall Street chief strategist says stocks will surge in the fourth quarter due to 'incredible economic momentum'

• The Leuthold Group's top strategist Jim Paulsen said Wednesday "incredible economic momentum" will drive US stocks higher in the fourth quarter of the year.
• He said a broader economic recovery in some US consumer-facing industries has prompted a rise in confidence.
• He said: "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. So, I think it's going to prove to be another good quarter."
• Visit Business Insider's homepage for more stories.

Investors have many reasons to be upbeat going into the fourth quarter despite a recent bout of weakness that caused US blue-chip indices to fall to two-month lows, a top Wall Street strategist said Wednesday.

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

US stocks fell for the first time in six months in September. The S&P 500 ended the month down by more than 4%, the Dow lost almost 3%, while the Nasdaq dropped almost 5%.

Read More: BANK OF AMERICA: Buy these 29 high-quality value stocks primed to cash in on the economic recovery

But Paulsen thinks bullish activity on Main Street will push stocks higher over the next quarter.

"If you look at the consumers, they are buying big-ticket items at an amazing pace," he said. "I think it is interesting that consumers are that confident to show these type of behaviours."

Paulsen noted a broader economic recovery in several sectors, including the housing and automotive industries which is prompting a rise in consumer confidence, he said.

The National Association of Realtors' Pending Home Sales Index soared 8.8% last month to a record high of 132.8, thanks to record-low mortgage rates, according to data published Wednesday. The reading marks a fourth-straight monthly increase for the index.

Paulsen said a divergence in Wall Street and Main Street confidence levels has historically generated a stock market-rally.

Read More: A fund manager who's beaten 99% of her peers over the past 5 years told us why she remains bullish on growth stocks despite the recent sell-off — and listed her 3 favorite stocks for continued gains in the decade to come

"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. So, I think it's going to prove to be another good quarter," he said.

Paulsen said investors should invest beyond the technology sector, which has helped the US stock market stage a remarkable recovery since touching multi-year lows in March, and consider both cyclical and international stocks as well.

Investors exiting tech stocks was one of the main reasons prompting US stocks to fall in September.

"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," he concluded.