David Rosenberg ponders on the question from a historical perspective:
The problem for Mr. Market is that it went into this latest Europe-induced ordeal with an excessively bullish GDP growth outlook for the U.S.A. – at the April highs, we would argue that a GDP growth rate of 6% was effectively being discounted. How nutty is that?
In the aftermath of the correction, the equity market is now pricing in a growth rate closer to 3.5% — the fact that earnings have been rising while the market has been correcting has helped cut the degree of overvaluation in half, to a 0.5 standard deviation from 1.0 just over a month ago on a Shiller normalized P/E ratio basis. But the ECRI leading economic index is actually foreshadowing a deceleration in real GDP growth, to 1.5% in the second half of the year from the 3.75% average pace since the recession technically appeared to have ended around mid-2009. The S&P 500 level that would be consistent with that sort of pace would be closer to 850 than the current level of 1,074. In other words, there is still more air to come out of the balloon.