Le’s start with the premise that, according to market authority FactSet, the PE on the S&P 500 based on current earnings is just above 16.

Investors (maybe we should read “me”) tend to value the S&P 500 in three different ways:

1.  relative to bonds, which is the second main class of liquid investments open to us as individuals.  Cash is the third and final asset, but can be ignored for the moment since the income from cash–its main attraction–is effectively zero.

The way people usually do the comparison is to take the earnings yield (1 divided by the market PE) on stocks and compare it with the interest yield on government bonds.   The latter is currently around 3%, which would imply a PE on the market of 33+.  We know, however, that we are at an emergency-low level of rates and that the Fed intends to lead long rates back to 4%+.

Nevertheless, bond yields would have to get to 6%+ before they would tempt investors away from stocks, at least according to my rule.

My conclusion:  bonds are, and will remain for some time, dangerously overvalued.  In any event, they don’t seem to be a realistic threat to stocks.

2.  the rule of 20.  This is a seat-of-the-pants empirical generalization about the US stock market.  It says that the sum of the current market PE + inflation should not exceed 20.

We can look at this rule in two ways.  We could argue that the market is fairly valued since the PE on the S&P is 16+ and inflation is 2%+, which equals 18+, or maybe 19.

We might also say that inflation has to get to around 4%–hard to conceive in today’s world–before it becomes a threat to stock market valuations.

Either way, this rule says stocks are fairly valued now.

3.  earnings growth.  Here the rule is pretty vague.  There are two ideas:

–what moves the needle for the S&P is earnings growth.  Say a 10% rise in the S&P indexduring a given year is only justified by a 10% increase in S&P earnings, and (an idea from more inflationary times)

–that the PE and the rate of earnings growth should be at least in the same ballpark.

At the moment the earnings of the S&P aren’t growing–they’re falling.  That’s due almost completely to the drop in oil prices which has cut eps for petroleum companies in half.   That’s currently clipping about 4.5% from the S&P earnings total.  The stronger dollar is another drag, this because of the lower dollar value of earnings and assets that US multinationals have in the EU.

The earnings rule would seem to isay that the lack of earnings growth for the S&P this year would at the very least mean no advance for the index.

If, however , that what I believe–that we’ve already seen the lows for oil and the highs for the dollar–is true, both oil and the dollar are only temporary depressants to earnings.  Once we get six or nine months out, year on year comparisons will be against year-ago earnings already affected by the higher dollar and lower oil.

If this is correct, the real earnings growth question isn’t how eps will play out this quarter or next.  It’s who is there who hasn’t already factored both a higher dollar and lower oil into his calculations already.  My answer:  basically nobody, although admittedly there is inevitably some tiny fraction of people who never get the word.

Tomorrow.  the strangeness of 2015 to date.