Futures Now

Wells Fargo thinks it's time to buy into the sell-off, even with fears over trade wars and rate hikes

Trade war worries to linger, but markets headed higher: Wells Fargo

Last week, tech stocks sold off, the Federal Reserve hiked rates, and President Donald Trump inflamed tensions with the world's second largest economy.

To one market analyst, all of the above means it's not a time for investors to worry; it's time to buy.

"We're trying to get our clients to buy on these pullbacks," Scott Wren, senior global equity strategist at Wells Fargo, told CNBC's "Futures Now" recently. "We think this thing still has some upside the rest of the year."

The market cycle is not over, says Wren. He sees the tax changes that were passed late last year by Congressional Republicans providing extra economic stimulus, and likely extending the growth cycle by at least another year. Tax stimulus should give a big boost to corporate earnings this year.

On top of that, Wren expects the U.S. economy to reach 2.9 percent growth this year, up from 2.3 percent in 2017, without too much additional inflation pressure.

These factors make equity markets particularly attractive to Wren.

"Valuations are not stretched," he said. "Are they at the average or the median? No they're not, they're a little bit higher than that, but they're not dramatically higher than that."

The price-to-earnings ratio on S&P 500 stocks remain at elevated levels of recent years, though the metric has sharply declined since highs seen at the beginning of the year.

The benchmark index currently trades at 16.5 times forward earnings, down from an 18.6 times multiple at the end of January when it last hit record highs. That is still a far cry from the dotcom bubble era, when the S&P 500 traded as high as 25.8 times earnings at the tail-end of the boom.

The potential for a U.S. trade war with China sent markets tumbling last week, but Wren sees the likelihood of all-out conflict at just 20 percent. Wren expects markets to react as they have in recent weeks – with an immediate sell-off on new developments, but then a subsequent rebound.

"This is going to be on the front burner for the next couple of years," he said. "I just really think this is not going to be an all-out trade war, but obviously the market is worried about that and certainly if that would happen that wouldn't be a good thing."

The next market worry is the Fed, says Wren. The central bank raised borrowing costs last week for the sixth time since the financial crisis, a move widely expected by markets. Higher economic projections did come as a mild surprise, pushing up the possibility of a fourth rate hike by year's end.

"Four is a mistake. I think that the Fed is not behind the curve. I do think finally the labor market is getting tight," said Wren. Unless "you think inflation is going to jump higher, which we really don't, four seems extreme to me."

The market is pricing in an above-average chance of another rate hike in June and September, according to CME Group Fed Funds futures. A fourth rate hike in November or December is also seen as a possibility.

Even with changes to monetary and trade policy, Wren remains bullish on the stock market. He reiterates his midpoint price target on the S&P 500 at 2,850 for the end of the year. A finish at that level marks a 6.6 percent advance for the year.

Major indices are breaking down, and it's about to get worse