History says now is the time to buy stocks with inflation past its peak, according to a Wall Street chief strategist

James Paulsen of The Leuthold Group said in a note on Thursday that investors should start buying stocks when inflation peaks.

Even though inflation is still elevated, investors have a green light to buy equities if inflation starts to decelerate. The S&P 500 has delivered positive one-month returns since 1945, when the annual consumer price index inflation rate fell or remained unchanged after peaking.

S&P 500 investors lost money in the month after an acceleration in the annual inflation rate when it was already above 4%.

The level of inflation is not likely to be a problem for the stock market if it remains unchanged or decreases.

He pointed to a number of data points to support his view that inflation has peaked. A decline in freight rates, sideways action in commodity prices and wage inflation, and March's coreCPI reading coming in below expectations all suggest to Paulsen that inflation is set to decline.

Paulsen said that a declining trend in retail sales and a flattening in housing-related measures suggest that some demand destruction is starting to surface due to both higher inflation and mortgage rates.

The Federal Reserve has begun its first interest rate hiking cycle in over a year in a bid to tame inflation. The Fed is considering a 50-basis-point interest rate hike in May.

The stock market will face a rough road if the inflation rate goes up. If inflation is poised to contract in the coming months, it will likely prove to be very rewarding for the stock market, as the environment for stocks is likely not very dangerous.

If inflation starts to roll over, now will be a good time for investors to buy stocks at an attractive price.

By the end of this year, we think a decline in the consumer price index to under 6% is probable, according to Paulsen.

The Leuthold Group