Stock Market Expectations

Which view of the stock market to you take?

On the one hand there is the fundamental interest rate, inflation approach. It says that the market overreacted to the two shocks of Greece and Deepwater Horizon and is now cheap.
The S&P 500 PE on trailing operating earnings is now 16.5, and according to the traditional relationship with interest rates and inflation that is well below fair value and thus creates a buying opportunity, at least in the short run.
Alternatively, you can take the money supply approach that says the Greece and Deepwater Horizon shocks were just the first shocks and that because of weak money supply growth more shocks of this nature should be expected.

Note, that the first drop in the PE early this year was simply the massive write-offs of 2009 rolling out of the trailing earnings data. Consequently, that PE drop was expected and was not a problem. But now with the spread between unit labor cost and prices at near record levels strong earnings growth should continue despite the point that a strong dollar is restrictive on the economy and will will dampen reported foreign earnings — up to half of the
S&P 500 operating earnings.

You pays your money and make your bets.

What do you think?
In the comments there was a discussion of the frequency of the market PE, and my point that there is no central tendency for the PE to converge on the average PE of about 14– 14.5 to be exact.

Here is the market PE since 1871.

Here is a histogram or frequency distribution of the market PE since 1871.

If you combine the individual distribution into ranges of about 2 PE points — below 12,
12 -13, 14-15, 15-16, etc., etc., this is the distribution you get.

As I said in the comments if you pick any random time the PE is just as likely to be at any point between 10 and 20 as at the average of some 14 to 15.

Maybe in advance stat course you could pick this apart, but for all practical purposes and for general analytical purposes this clearly appears to support my point. Maybe if commentators actually ever looked at the data before they told me I was wrong I could accept their criticism or disagreement. But for someone to make up numbers out of thin air and proceed to tell me
I am wrong is not acceptable.