Lehman Brothers' top stock strategist believes US stocks are significantly undervalued and may rise more than 20 per cent over the next 12 months.

This is underpinned by the likelihood that the US government will continue to pursue sound economic policies, and the potential for the US Federal Reserve Board to reduce interest rates.

Mr Jeffrey Applegate said US stocks were trading below fair value, based on a Lehman model that takes into account US companies' likely future earnings. He said stocks in the Standard & Poor's 500 index, a broad gauge of the US stock market, are trading at a price-to-earnings multiple of about 22, while the Lehman model indicates they should trade at a multiple of 25.5.

Mr Applegate said the S&P was likely to reach about 1,700 towards the end of next year. Stocks would be propelled to higher levels because the US government's sound economic policies were unlikely to change substantially regardless of the winner of the presidential election, he said.