I value the market off of normalized profits, which I define as a normalized profit margin multiplied by sales.  The normalized profit margin is the expected profit margin of the market over time.  At times, it has been as high as 10% and as low as 3%.  My assumption is that the normalized profit margin is 7%.  Sales per share of the S&P 500 is $1,000 a share.  Thus, the normalized earnings of the market is $70.

When constructing such a model, one strongly prefers confirmation of one's thesis based on another methodology.  Indeed, as the Wall Street Journal pointed out, $70 is a fair approximation of normalized earnings, given the long-term trend in earnings.

Since World War II, earnings have grown at about 6% a year, slightly trailing economic growth. But earnings have fallen well off trend during the current recession.

"As-reported" earnings per share -- which, unlike "operating" EPS, conform to accounting standards -- of companies in the S&P 500 are on pace to total just $28.75 for the past four quarters, according to Standard & Poor's. That is roughly 61% below where they would be had they maintained a 6% growth rate in recent years, estimates Vitaliy Katsenelson, head of research at Investment Management Associates in Denver.

Earnings 61% below the trend rate would put normalized earnings at $72.

The research firm, Comstock Partners, also estimates that trendline earnings are $70.

In his book, Unexpected Returns, published in 2003, Ed Easterling estimated that earnings in 2009 would be $67, based on a forecasted normalized path of earnings growth.

"But," the critic would say, "the economy is going to grow much slower in the future."  Yes, that may be true.  However, long-term economic growth per capita after inflation has been 2% since 1871, which is the long-term rate of productivity growth.

Has productivity growth structurally slowed such that a 140-year trend - with a few blips here and there - has been permanently derailed?  I would not bet on that proposition, and it is an issue I will address in the context of the current environment in the near future.

Thus, I am comfortable with using $70 per share as my normalized earnings approximation.