Leuthold Group's Jim Paulsen is tempering his bull case for stocks.

Even though he believes the S&P 500 could rally at least another 10%, there's a catch.

Paulsen won't rule out a recession.

"Between now and the summer, we're going to decide whether the economy is going to hold together or whether we're falling off a cliff," the firm's chief investment strategist said Wednesday on CNBC's "Trading Nation." If we're not falling off a cliff, it could go quite a bit higher in the second half of the year."

According to Paulsen, the most likely scenario is the economic and earnings slowdown will elongate the recovery and bull market. He finds full-on policy support from the Federal Reserve and White House favorable for additional stock market gains.

But he's not willing to bet all his chips on it.

"Recession and bear market fears would return very, very quickly and very harshly," he said. "We have a good deal of fear. Fear of bear markets. Fear of recessions. Fear of negative yields. Fear of reverting curves. ... We're climbing a wall of worry."

Yet, the is up almost 23% from its December low and more than 15% this year. The index is just 2% from its all-time high.

"Ultimately, if the economy stays together, then the market is going to keep going higher. And, if it does, there's going to be a lot of portfolios that really don't buy into this rally yet that are going to find themselves underweighted," said Paulsen, who prefers to hedge U.S. risks by increasing his exposure to international markets.

Regardless of whether U.S. stocks surge past record highs or get hit with a serious pullback, he warns the rally is on borrowed time.

"We'll get back to overheat conditions and pressures," Paulsen said. "That could come as early as the end of the year or maybe sometime next year again where better news is bad news again."