With the S&P 500 breaking 3,900 today, let's take a look at valuation.

First, when we entered earnings season, the expectation was for another deep decline in year-over-year earnings. 

Given that Q4 2019 registered a near record high on quarterly earnings for S&P 500 companies, the idea of beating such a number in Q4 2020 (in the midst of a Pandemic and a government throttled economy) wasn't even on Wall Street's radar. 

But we might get it. 

With about 85% of companies now reported, about 8 out of 10 have beat on estimates, and the change in earnings compared to Q4 of 2019 is now projecting a +3.6% growth.  That compares to what was expected to be a 9.3% contraction.

With that, if we look at the earnings projections for full year 2021, the forward P/E on stocks (the S&P 500) comes in around 22.  

That's well above the long run average P/E (ttm), which comes in around 16. 

But, we're not just in a low rate environment, we are in the extreme of all low rate environments — zero rates.  And historically, when the 10-year is below 3%, stocks tend to trade at a P/E north of 20.  Why? The low rate environment does what is intended to do, force people "out on the risk curve" (i.e. force them to accept additional risk in pursuit of higher required returns).  That means, out of bonds, and into stocks (which drives higher multiples).   

So, a forward P/E of 22 could still be cheap in this rate environment, especially with the Fed's aggressive QE program/stance.

But I suspect this multiple will become cheaper and cheaper, as we begin to step through 2021 earnings.   The full-year estimate for this year is looking for 23% earnings growth.  That number may be crushed. 

Remember, these companies will be reporting against a very, very low earnings base, especially from the first half of 2020.  As we know, corporate America always takes the opportunity to put all of the bad news on the table in a widespread crisis.  It's safe to say that any loss or writedown they could take, they took last year (when things were broadly very bad and uncertain).  That sets up for big growth in y-o-y earnings for 2021 – even bigger than Wall Street's full year estimate of 23% growth.  And a higher "E" in the P/E, drives down the valuation on the broad stock market.  

Bottom line:  Even at a forward P/E of 22, in this (global) rate environment, stocks may still be relatively cheap.  And it's likely that valuation will be getting cheaper, especially with more stimulus dollars coming down the pike to stoke economic growth.