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Stock market nearing old highs, but at 'cheaper' prices

  • At the late-January high, stocks were at their loftiest valuation of this cycle versus expected earnings and compared to Treasury yields.
  • In late January, the S&P traded at 18.5-times forecast earnings for the next 12 months. Now the index is back to 17.4 forward price/earnings multiple.
  • And a bit of simple market algebra could be used by the bulls to pencil in a run to 3000 on the S&P 500 – up 8 percent from here.
Shoppers at an H&M store in New York.
Scott Mlyn | CNBC
Shoppers at an H&M store in New York.

The S&P 500 has worked its way higher in a jagged but estimable 10 percent climb off the low set early on Feb. 9, which for now represents the depths of the market's first serious correction in two years.

The index now sits about 3 percent from its record high set Jan. 26. That threshold, at 2872, is certainly within sight and reach, and could be revisited with just a bit release of tensions along the trade-policy or interest-rate fronts.

At the late-January high, stocks were at their loftiest valuation of this cycle versus expected earnings and compared to Treasury yields. And as the S&P shot up more than 7 percent from New Year's to the peak, investor optimism and aggressive risk-taking reached parallel extremes.

The good news is that the swiftest double-digit correction from an all-time high last month skimmed some froth from both valuations and sentiment.

In late January, the S&P traded at 18.5-times forecast earnings for the next twelve months. Now — with profit estimates continuing to rise at a rarely seen pace thanks to tax cuts and global growth — the index is back to 17.4 forward price/earnings multiple. That's still a bit rich, but investors have already proven they can stomach owning stocks above that valuation, if confident in the growth outlook.

Investor mood was certainly shaken, even if acute panic never quite took hold in the selloff. The CNN/Money Fear-Greed Index reached depths below 20 on a 0-100 scale in recent weeks, down from around 80 in January and is now near 40.

So even if the S&P blipped higher another 3 percent to retake the former highs fairly soon, it's likely that valuation and sentiment would be less extended this trip — leaving a bit more headroom for a foray into fresh record territory.

And a bit of simple market algebra could be used by the bulls to pencil in a run to 3000 on the S&P 500 – up 8 percent from here. Just slap January's peak multiple on today's forward earnings forecast and the index is there – and would mean a 12 percent gain from year-end 2017, which would come with dividends of close to 2 percent and make for another above-average year.

Simple as it seems, any trip to those levels would likely have twists and stops along the way.