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Wharton's Jeremy Siegel: Stocks could pop another 10% if China trade fight and NAFTA get resolved

Matthew J. Belvedere

The stock market could increase another 10 percent this year if the U.S. were to settle its trade war with China and reach a new North American Free Trade Agreement, Jeremy Siegel told CNBC on Thursday.

The S&P 500 was already 7 percent higher for the year as of Wednesday's close.

"The next few months are going to be a challenge," said Siegel, the Wharton School finance professor who for years correctly called the march higher on Wall Street. He recently became a bit more cautious.

"But if we can get China [and] NAFTA settled, I see a 10 percent pop in the market because I think that's the kind of 800-pound gorilla keeping a lid on prices now," Siegel said on "Squawk Box."

Earlier this month , Siegel warned that implementation of the $200 billion worth of additional tariffs that President Donald Trump has threatened could result in a "20 percent drop" in stocks.

On Tuesday, the S&P 500 during the trading session hit an all-time high for the first time in seven months but failed to close at a record. A day later, the stock bull market became the longest ever. It started March 9, 2009.

In the beginning of 2009, Siegel was one of the first forecasters to express optimism about stocks coming out of the financial crisis, which tanked markets.

"When we go back all the way to 2009, I thought that was one of the easiest calls I made," Siegel said on CNBC Thursday.

"The previous longest bull market ended in March of 2000 with a price-earnings ratio at 30 for the S&P. We're looking at 18 right now for looking at this year's earnings," he said, arguing the current market is "much less overvalued."

Interest rates are also much lower now then they were after the dotcom bubble burst in 2000, he argued, saying the last bull market and this one feel nothing like one another.

Siegel said a market multiple of 18 to 20 times earnings in a "low rate environment with a stable economy" is not too lofty.

However, Siegel did point out some headwinds including trade uncertainty, a Federal Reserve that "looks still pretty aggressive," and the midterm elections.

"Odds makers are saying that may be Democrats are going to take the House," he observed.

If Republicans were to lose control of the House but keep the Senate, that might not be the worst outcome for markets because President Trump's corporate tax cuts and deregulation are already in place, Siegel said.

Without control of the House and Senate, Democrats would not be able to rollback Trump's economic agenda, he said.

"The most important plus of the Trump adminstration was that corporate tax reform," Siegel said. "That really was a good 10 [or] 12 percent of the earnings growth. Two-thirds of earnings growth this year was due to that."

Siegel said it's pretty hard for Democrats to run against low unemployment and a strong economy. Despite expectations for a tough November for Republicans at the polls, those factors are positives for GOP candidates, he concluded.