U.S. stocks are trading at compelling prices after their plunge to 12-year lows this week and could rally 25 percent by the end of the year, said Jim O'Shaughnessy, a well-known investor on Wall Street.

U.S. stocks, as measured by the benchmark Standard & Poor's 500 Index <.SPX>, are likely to return after inflation 7.3 percent per year from now through 2019, said O'Shaughnessy, author of the best seller, What Works on Wall Street.

A rising savings rate and an improved housing market, while not completely healed, point to brighter times ahead in the U.S. economy, O'Shaughnessy told Reuters in an interview.

I do think that as all that coalesces, you see a good chance for the S&P 500 (at) 900 out of the year. What are we right now? 713? That could be a very nice rally, he said, in reference to Wednesday's closing level for the S&P 500.

O'Shaughnessy, who makes investment decisions based on the quantitative analysis of 10,000 stocks and their prices over the past five decades, said the recent carnage in stocks only heightens what to expect over the next five to 10 years.

A review of the 12 worst 10-year rolling periods since 1926 shows that from the bottom, there were no negative returns over the next decade. The first year out, stocks returned 25 percent; after three years, 11 percent; and after five years, almost 13.5 percent, O'Shaughnessy said.

Following are more of O'Shaughnessy's views and opinions on the state of the financial markets:

HAVE U.S. STOCKS BOTTOMED?

The problem with today is everybody's fighting the 'Where's the bottom?' fight. If you try to keep a relatively longer-term perspective, which is three to five years, you get shouted out ... From our point of view the market is even more compelling than it was when we spoke at the beginning of the year.

Yeah, we could go down some more here in the short term, but it only makes the ultimate valuation more and more compelling.

We're going to have a rotten jobs (report) on Friday. We're going to have other bad news, and you just look at the market in that light as a discounting mechanism.

Is it easy? Of course not. It's horrible. You look at the day to day in the market, and you shake your head and think, 'Well this is, of course, why there is that thing called the equity risk premium.'

WHAT ARE YOU BUYING, OR NOT BUYING?

Kind of for the first time, across all sectors. We're not in a situation where we're really super-favoring any one sector. I would say we have notched up our buying of consumer discretionary <.GSPD>. It makes some sense to me. A couple of months ago, we had all the deep discount -- dollar stores and that kind of stuff -- now we are starting to see it broaden out a little bit.

We're kind of neutral, with the exception of consumer discretionary. We're buying every sector. Now our financials have gone down (in our portfolios), we got stopped out of the bigger ones, because one of our criteria is you got to have positive cash flow.

Several months ago, I said the new bubble is Treasuries ... You got all that money going into the 10-year Treasury ... People in it are going to get very, very hurt. I was massively bearish on Treasuries a couple of months ago; I'm still pretty bearish. By the way, not on some intermediate corporate debt, some of it's getting priced to the point, well, OK.

ANY BIG HURDLE, ANYTHING THAT IS IMPEDING THE MARKET?

I certainly would love to see less histrionic talk coming out of Washington. Moods of people in markets do matter. I think that you have gotten to the point where we get it. We get that you're all mad, and we get that you think that people have been irresponsible.

(Reporting by Herbert Lash; Editing by Jan Paschal)

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