The forward Earnings Per Share (EPS) for all S&P 500 companies combined increased last week from $160.66 to $161.17.

The S&P 500 index increased 1.25% last week, bringing the price to earnings ratio (P/E) up to 23x. Basically, what this means is that investors are paying $23 for every $1 in S&P 500 earnings right now. Which is above the historical averages.

Of course, regular readers know true valuation has to take into account interest rates.

The S&P 500 index increased more than the EPS estimates, so the earnings yield on the S&P 500 actually ticked down from 4.39% to 4.34%. The 10-year treasury bond rate increased last week from 0.893% to 0.948%. The equity risk premium contracted a tad, but clearly, nothing that would signal stocks are overvalued in comparison to fixed income alternatives.

Economic Data

Some effects of state restrictions in the fight against COVID are finally starting to show up in the data. Total retail sales for November came in at $546.5 billion, down -1.1% from the prior month. This was the first decline in the last seven months. However, total retail sales are still +3.2% above the pre-COVID highs and +4.1% higher than last year. Clearly, consumers are shifting some of their purchases from travel and leisure to goods.

Weekly unemployment claims ticked higher for the second straight week, coming in at 885,000. To put this in context, the high point during the 2008 recession was 670,000. So we are still above the peak of the prior recession on weekly unemployment claims.

Continuing claims continue to trend lower but still remains well above the pre-COVID levels. Hopefully, some fiscal relief is just around the corner.

Leading Economic Indicators index increased 0.6% in November. Prior monthly gains were 0.8% and 0.7%, suggesting some loss of momentum. The index still remains below pre-COVID highs.

Summary: The macro-environment continues to be a mixed bag, giving something to both bulls and bears. It remains a glass half full/empty situation, depending on one's own bias. I continue to lean towards the glass half full side based on record corporate profits and low-interest rates. So far the market continues to agree with me. Current GDP estimates for Q4 are as high as 11.1%. The Federal Reserves meeting confirmed their accommodative support of the economy, while they also upgraded their economic projections.

Bottom line, the recovery remains intact but it looks like Q1 2021 could be soft. We remain in a bull market but risk levels are elevated compared to the pre-COVID levels. There is light at the end of the tunnel, the question is how much has the market priced in already.