Last week the S&P 500 earnings per share rose from $159.89 to $160.08, and the S&P 500 index rose 2.27%.

Because the index increased by more than the increase in the EPS, the price to earnings ratio increased to 22.7x. A higher PE means stocks are more expensive on a valuation basis.

The earnings yield on the S&P 500 now stands at 4.40%. And while the 10-year Treasury bond rate rose from 0.83% to 0.84% last week, the equity risk premium still has stocks the clear winner.

Annual earnings growth projections now stand at:

2020: -15.5%

2021: +22.4%

2022: +16.36%

At this pace, a new all-time high in EPS is projected to come in sometime during the 1st half of 2021. Which would be a record earnings recovery from past recessions (it took 5 years to make a new high in EPS after the 2008 recession).

While the S&P 500 EPS is still below its pre-COVID highs, according to the latest GDP report from the Bureau of Economic Analysis (BEA), corporate profits for all US based companies soared to a new all-time high in Q3; coming in at over $2.1 billion.

In fact, with all-time high corporate profits and historically low-interest rates, there is a case to be made that stocks are still undervalued, even though the major averages have made all-time highs.

New home sales numbers continue to impress. 999K is a tick below the prior month because last month's numbers were revised higher by 43,000 (from 959K to 1002K). You have to go back to January 2007 to see new home sales numbers that high.

The economy grew a record 33% in GDP for Q3, and November is shaping up to be one of the best months for the stock market in 33 years. We are 2/3rds of the way through Q4, and the latest GDPNow estimates from the Atlanta Fed now project Q4 economic growth of 11%. Adobe Analytics announced that Thanksgiving day spending rose 22% year over year to $5.1 billion. And all this is without more fiscal stimulus. Which should come sometime early next year.

As a result, the “fear trade” is beginning to be unwound. Gold is down 15% from its recent highs, the 10-year treasury bond rate (although still low) is up from the 0.398% level it briefly traded at during the height of the March panic.

The volatility index (VIX) – chart above – during the March selloff in stocks, almost traded above the highs of the 2008 financial crisis. That index is well off those highs, and briefly traded below 20 on Friday, but still clearly above the pre-COVID low levels.

20 is a technically significant level in my opinion. Most bull market advances occur with the VIX trading below 20. A VIX in the 20 to 40 range is more of a traders market with increased volatility. And a VIX at 40+ is dangerous.

I suspect we won’t see the VIX stay below 20 while the threat of more ridiculous lockdowns is still upon us. It’s probably the biggest near-term threat. EPS projections would be highly unreliable should such an event occur again. Even so, the worst of the damage has already been done, unfortunately. So I doubt it would have a major impact again. Hopefully, we never have to find out!

With the other 3 major averages all trading above prior all-time highs, the only visible potential resistance level I can see resides in the Nasdaq 100 index (chart above). The range is 12,417.45 to 12,439.48, which represents the open price gaps from September 2nd.

This week we’ve got some key economic data points like ISM Services & Manufacturing, along with the jobs report. We’ve also got some key earnings for the software stocks that have done so well this year. The ones I’ll be paying special attention to are:

Zoom (ZM), Salesforce (CRM), Crowdstrike (CRWD), Zscaler (ZS), Docusign (DOCU), VEEVA Systems (VEEV).

I own them all and have actually reduced positions in all of them except VEEV recently. They all have had such great runs this year, I figured its time to start looking to allocate some money to the “reopening” trade, since the markets are always looking 6-12 months in advance.

Stay the course but buckle up for the next few months.