Another massive rally in this Bear Market – Where do we go from here?

So with another massive rally, many people are surely wondering if we've seen the bottom. Personally, I think we've seen the bottom for this year. It would take something new and unexpected to see new lows before end of year in my opinion.

For now, I think this rally has legs until January. Here's my rationale:

• We've likely reached peak inflation fear now that CPI has started rolling over.
• Fed rate hike odds and the fear surrounding that has also likely peaked, and appears to be priced in by bonds.
• More certainty in the markets post mid-term election.
• Hedge Funds / Money managers who need to “catch up” are going to press this thing. I expect a series of higher lows and higher highs like back in June-Aug.
• Positive seasonal trends (Christmas rally, January effect)

Now this doesn't mean we just rally non-stop, I think there's going to be a lot of chop and ultimately we can top out around S&P 4200. That said, after all that's done and the market has convinced everyone the Bear is dead, that's when we should start seeing the effects of the rate increases on the economy in Q2-4 next year. The only thing that matters at the end of the day are corporate profits and how high interest rates are.

The average forward P/E on the market over the last 10 years is 17x. That's with effectively 0% interest rates and QE. Before infinite QE and ZIRP, the average P/E multiple was around 15x.

Next year earnings (EPS) for the S&P are expected to be at around 230, so at S&P 4000 we're trading at a 17.5x forward P/E multiple (historically high).

Earnings will likely come down in 2023 as higher interest rates work their way through the economy. Looking at Analyst estimates for next year EPS, The Bear case is EPS of 200, Base case is 215, and Bull case is 230.

Using the Base Case middle of the road EPS range for next year (215), let's assume a 16x multiple (which makes sense in a higher interest rate environment). That would put the fair value of the S&P for 2023 around 3440.

Obviously there's much more to it than just P/E, but this is the framework I'm using to think about the potential trading range we could expect in the coming months. Would love to hear others thoughts on this and challenge my biases.