On that note, as stocks continue to rise, what's the appropriate multiple on a stock market where rates are zero, and where the Fed is a buyer of practically any asset that could become threatening to the economy (which already includes corporate bond ETFs, and would likely include broader stocks, if an unstable stock market became a risk)?

The answer is, the P/E on stocks can go much higher.  

Remember, Warren Buffett made this point a few years ago, about stock market valuations in zero interest rate environments:  He said when interest rates were 15% [in the early 80s], there was enormous pull on all assets, not just stocks.  Investors have a lot of choices at 15% rates.  It's very different when rates are zero. He said, in a world where investors knew that interest rates would be zero "forever," stocks would sell at 100 or 200 times earnings because there would be nowhere else to earn a return.  

We don't have a "forever" commitment from the Fed (thankfully), but the Fed has vowed to wait until recovery proves to be sustained, before they will start moving rates — i.e. they will let the economy run hot.  

At the moment, the P/E on forward earnings (estimates on S&P earnings over the next 12-months) is 21.8.  That's on an earnings estimate that has been dialed down dramatically (on what is a pure guess from Wall Street). 

As we've discussed in the past, when you have an environment like this, corporate America will always take the opportunity to put all of the bad news and bad scenarios on the table.  If there's a write-down opportunity on an underperforming asset, now is the time to take it.  It all resets the earnings expectations bar to a very low level, which makes it easy to step over (i.e. to beat).  

But even if we assume the big earnings drawdown that Wall Street is projecting, and even if we remove zero rates from the argument, the average P/E on the S&P 500 is still cheap relative to the average P/E of the past 21 years (which is 25.4). 

Plus, consider this: The valuation on stocks tends to run well above average, coming out of recession.  Coming out of the 2001 recession, the P/E on the S&P 500 was 46.  

With that, if we assumed a 20% decline in S&P 500 earnings and put a 30 multiple on it, we would have something around 4,200 in the S&P 500.  That’s 32% higher than current levels.