Via KesslerCompanies.com,
We like to consider the longest time periods available to find reliable historical trends in data series. Of these, the price/earnings ratio (p/e ratio) of the S&P 500 index is instructive to study. Major bull markets in equities tend to start from heavily disfavored markets; those with earnings multiples (p/e ratios) in the single digits. In a sense, investors have to give up hope in the stock market before it can regain popularity. In the chart below, you will see that price/earnings ratios around 6 or 7 have preceded long equity bull markets.
Yet, for all the upheaval in the markets over the last 16 years, the US stock market has not yet fallen to single digit p/e ratios. The S&P 500 p/e ratio is currently about 16 and it has been 33 years since the index last traded with p/e below ten. We maintain that this will likely fall this low before the downside of the credit cycle is finished. With earnings now, a single digit p/e would imply an S&P 500 below 1109; a whopping 40% below current levels.
It is important to note that these are glacial processes and we aren't predicting this to happen on any particular schedule, but markets in 2016 have returned to a sense of fear and we just want to remind readers that there is a lot of space between 1870 and 1100 in the S&P 500.