UBS predicts a S&P 500 rally next year that's 20% higher than current levels

Key Points
  • History shows when the the S&P 500's price-to-earnings ratio declines that a rally is on the way, UBS' Keith Parker says.
  • Returns on earnings have averaged a 16 percent in years after a P/E decline, he says.
  • The S&P will reach 3,200 by the end of 2019, Parker says. That would be about 20 percent higher than Thursday's close.
UBS: Stocks are cheap and based on history, now's the best time to buy
UBS: Stocks are cheap and based on history, now's the best time to buy

The could rise more than 20 percent from Thursday's close by the end of 2019, UBS' Keith Parker told CNBC.

Though earnings are up 20 percent this year, S&P stocks are cheap and the index's price-to-earnings ratio has declined about two times, which historically has led to a rally in the following year, UBS' chief equity strategist said on "Fast Money" on Thursday.

"What's interesting is that median returns and average returns in the year following are actually 16 percent, well above historic averages and only two years of negative returns," Parker said.

UBS' price target for the S&P 500 is 2,875 by the end of this year — a gain of about 10 percent in the next two weeks — and 3,200 at the end of 2019.

With the Federal Reserve likely to raise interest rates next week, Chairman Jerome Powell's apparent decision to pull back on the number of planned hikes will also benefit the market next year, Parker said.

"Lower interest rates should support asset prices, all else equal," he said.

In addition, Parker is hopeful that the U.S. and China will reach a trade deal in coming months.

"We have, now, between now and March, with a number of political nuances in between, to potentially price out that trade risk," he said.