Stocks will roar higher if the latest 40-year high in inflation marks a peak, says a Wall Street chief strategist

James Paulsen of The Leuthold Group said that stock market investors may be too focused on the rear-view mirror.

By the time inflation peaked, the economy had already been damaged and a recession had started. Paulsen said in a note that a recession should be obvious by now.

According to Paulsen, a peak in inflation is what the stock market needs to stop its bleeding and resume its long-term uptrend.

The stock market rose in the next year regardless of how fast inflation moderated from its peak and whether or not a recession developed. The S&P 500 gained 13.2% in the year after the inflation peak.

Friday's report showing prices rising at the fastest rate in 40 years dashed hopes that inflation would peak in May. It's hard to believe that inflation will peak anytime soon with oil prices still high.

According to Paulsen, once inflation does fall, it's like a "V" top rather than a rounded top. According to Paulsen, US inflation could fall to 4% by 2023, based on the average decline in inflation after historical peaks.

It would give the Federal Reserve more flexibility in its tightening cycle if inflation fell quickly. It's possible that the economy is on better footing than people think, which would help lift stock prices, according to Paulsen.

The economy does not appear to be in a recession, despite the fact that the unemployment rate is at a cycle low, S&P 500 earnings are still rising, and junk credit spreads are still below average.

There could be big gains for the stock market. The current expansion may last for several more years if the economy is not already in a recession.