Legendary Wall Street watering hole Harry's was packed Wednesday night with holiday dinner parties, but the mood among traders was downbeat. "What a lousy market," one trader said, over a $16 glass of chardonnay. They complain, but they still pay for the chardonnay. Still, with the Fed meeting out of the way, most seemed eager to be rid of 2022. There's good reason to be somewhat downbeat. The stock market has a serious valuation problem. Stocks cannot move too far from economic reality. There is a relationship between future dividends and earnings and the price of stocks. The relationship has some elasticity: it can stretch when the economy is improving and earnings are expected to expand, and contract when the economy and earnings slow down. Right now, Wall Street strategists are in the process of reducing earnings estimates for 2023. I noted yesterday that the average of 17 strategists have S & P 500 earnings down 6% next year. That is an earnings recession. It's a modest earnings recession (severe earnings recessions can see earnings drop 20% or more) but it's an earnings recession. If earnings really are going to be down 6% next year, then the S & P 500 is trading at about 19 times 2023 earnings estimates. That is a very rich multiple. The historic average is 17 times forward earnings. Multiples have been high before: it was almost 30 at the height of the dot-com bubble, and over 20 briefly during 2017 and 2018, and again in the middle of Covid in 2020 and part of 2021. But that is fairly rare. If we assume the strategists are right, and earnings will be down 6% next year, in order to argue for a higher S & P 500 in 2023, there has to be an argument made for an expanding multiple. If, for example, you want to argue that the S & P 500 should rise 10% next year to 4,400, that would be a multiple of 21. That is nosebleed territory. To argue for a multiple that high, you have to make an argument that the economy and corporate profits are going to be expanding in 2023. That is a tough call to make right now.