Alternatively, you can reverse-engineer this as follows:

• 15 times $70 = 1050
• 1050 minus 940 (current S&P level) = 110
• 110 divided by 940 = 11.7% (right around the historical return for large-cap stocks of 12%)

With this data, investors can more productively engage in the message of the market debate while focusing not on past or present, but on the future -- the point in time when stocks discount. Is $70 achievable over the next 12 months? Is 15 the appropriate P/E?

The conclusion I reach is that at current levels the S&P 500 is fully valued. While macroeconomic reports over the past several weeks suggest that current earnings expectations are too pessimistic and will adjust upward in the coming months, it is hard to be more enthusiastic than the result I noted above (15 times $70 = 1050 = 11.7%).

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What a Correction Can Do for You

• Evidence that second quarter 2009 will produce above consensus earnings reports
• Expectations that third quarter 2010 will justify higher stock prices

In many respects, the second is contingent on the first, as it provides the “proof’ that the worst of the economic and credit crisis (they are tied together) has been seen. If so, then economic momentum will follow economic stabilization, which will produce earnings of   greater than $70 into the third quarter of 2010.

Investment Strategy Implications

The 2 central points I'm attempting  to make are these: First, like technical analysis, forward-looking valuation analysis contains the message of the market. Second, investors are better served debating the future, which is contained in the valuation message of the market, rather than the present or the past.

Market methodologies such as valuation analysis and technical analysis shift the focus away from what you or I think the market should be to what the market thinks will be. Plus, such an approach forces an investor to distinguish between these 2 things. Lastly, forward-looking valuation analysis demands that an investor consider the future valuation numbers rather than the backward-looking approach of P/Es today.

Investing is a game of expectations. Forward-looking valuation analysis is the best strategy for winning the game.