With earnings improving I see equity prices improving.
If there was such a thing as a rational investors, he would look at his expected return on an investment when deciding whether to buy or sell that investment.
When you factor in that there are two major competing areas of U.S. Financial markets equity (stocks for the most part) and debt (bonds for the most part), you'll realize that if bonds are not offering a good rate of return (i.e. a low interest rate), the rational investor won't require stocks to have a good rate of return (in other words the investor will accept high P/E ratios). This breaks down, if you think like a hedge fund manager and are willing to invest outside the U.S. Financial markets, but if you are stuck in the U.S. financial markets like most mutual funds are, this holds true.
Right now if 10 year interest rates are 3%, that means $100 of bonds will produce $3 of interest per year or $30 dollars over ten years. In order for stock to match that rate of return a stock only needs a P/E ratio of lower than 33.33. Granted stocks are more risky than bonds so a rational investor will require stocks to have a slightly higher projected return rate than bonds to buy the stock. Thus, the S&P 500 has 10 year trailing P/E ratio of 20 to 1. Until bonds offer a better rate of return (higher interest rates), the rational investor won't require lower P/E ratios so stocks should continue to rise as earnings improve.
Thus in the next year I see a lot of votality with stock markets generally ending up a little ahead. However, sooner or later these quantativate easements will result in inflation and higher interest rates and when they do investors will require lower P/E ratios to stay in the equity markets (as again, the equity markets have to produce a slightly higher rate of return than the bond market in order for the rational investor to park his money there). Thus my prognosis is over the next 10 years the stock market does poor.
One issue I would like to get Tilted's feedback on is whether he thinks the 10 year or 1 year trailing P/E ratio is the most telling P/E ratio given the Great Recession and the recovery of the last few years.