A shrinking economy bodes ill for corporate earnings and current indications are that the S&P 500 Index’s earnings could be down by as much as 30% to 40% in year-ago terms by the end of Q2 2008.

The key to assessing valuation levels, however, is to get a grip on the forward numbers. This post analyses this aspect and concludes that it would be irrational to bank on above-average returns from these valuation levels. A muddle-through outlook seems to be what the US stock market has in store.