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ICYMI: S&P 500 Could Surge Another 12%, Market Bull Says

The current equity risk premium indicates the market has more juice left in it. We explain what that means.

It was not a good day for stocks, as all three major U.S. indices ended lower Tuesday, after having been higher in the late afternoon.  

Although some talking heads have been growing cautious on stocks, they have surged to start 2019 higher and there's still a technical argument for further gains.

Could the S&P 500 Push Even Higher?

"Stocks may keep going higher," wrote LPL Financial's Chief Investment Officer John Lynch, adding that "stock valuations, when compared with bond yields, are actually historically cheap."

Lynch noted that the current equity risk premium (ERP) on the S&P 500 is 3% against the 10-year treasury yield, which is currently at 2.63%. That risk premium of 3% is far above the average ERP of 0.5% for the past six decades, Lynch noted. Before we get into what this means for stock gains, let's go over this:

What is the Equity Risk Premium? The ERP is the difference between the expected average earnings yield on a stock for the next 12 months, usually for the S&P 500 for the U.S. market, and the yield on the 10-year treasury bond. It's a measure of how much excess return an investor is getting for taking the risk of owning a stock instead of a safe treasury bond.

Case in point:

Lynch wrote that, since 1960, when ever the ERP for the S&P 500 is above 3%, the index sees gains of 12.4% for the next 12 months on average.

SunTrust Merger?

Federal Reserve Chairman Jerome Powell said U.S. regulators will conduct a "thorough" review of BB&T's  (BBT) - Get Free Report  proposed acquisition of banking rival SunTrust (STI) - Get Free Report  after Democratic Sen. Elizabeth Warren called the process a "rubber stamp," wrote TheStreet's Bradley Keoun

Aurora Cannabis Buys in Portugal

Aurora Cannabis (ACB) - Get Free Report announced the acquisition of a 51% ownership stake in Portugal's Gaia Pharm Tuesday as the company looks to establish a local facility to produce medical cannabis and related products as it widens its presence in Europe, wrote TheStreet's Tony Owusu.

Related. RealMoney's Peter Tchir writes how to game plan ahead of the March 1 trade truce deadline.

Home Depot (HD) - Get Free Report , RealMoney's stock of the day, missed earnings expectations, but could still be a good bet says RealMoney's James Deporre.