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Bank of America: Stock market looks cheap again

Traders on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders on the floor of the New York Stock Exchange.

Bank of America Merrill Lynch believes the market is looking cheap again based on historical valuations.

The S&P 500 fell 10 percent from a high in July through the end of September due to slowing global growth concerns, especially in China.

Apparently this was all the six-year bull market needed to get cheap again.

"In September, the S&P 500's forward price-to-earnings ratio contracted to its lowest level in nearly two years, and at just over 15 times, sits in line with its historical average," Savita Subramanian, equity and quant strategist at the firm, wrote in a note to clients on Wednesday.

Valuation is important as it explains 90 percent of returns over a 10-year time period, according to the report. However, it's not so great at predicting short-term turns in the market, BofA said.

"Tech remains the cheapest versus history on relative forward price to earnings, trading at a slight discount to the market when it historically trades at a 16 percent premium ex-the tech bubble. But health care, which saw significant multiple compression amid the sell-off, is now a close second, with its relative multiple implying 16 percent upside to get back to average," she noted.

Here's what Bank of America Merrill Lynch recommends to buy now based on the analysis...

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