The stock market is near all time highs, and market valuations are stretched.
The S&P 500 12-month trailing price/earnings ratio is just under 21 while the 10-year average for this measure is just under 16.
Robert Shiller's Cyclically Adjusted Price Earnings ((CAPE)) measure is over 28. The historical mean for CAPE is around 18.
Stock prices usually move in advance of earnings results as investors push prices up in anticipation of the future earnings. The historical results are included because research has indicated that stocks always "revert to the mean" over time.
Thus, in order to justify the high prices, future earnings must go up… or stock prices will fall back.
During the current period of economic recovery, the increases in stock prices have exceeded the increases in earnings as the stock market has been supported by three rounds of quantitative easing that have been produced by the Federal Reserve.…