As Barry Ritholtz noted over the weekend, certain media outlets seem determined to find reasons for optimism in equities' recent breakdown. Not that there's anything wrong with that. Who knows. Maybe these will turn out to be "attractive levels."

One of these efforts to find a glimmer of short-term hope--Greg Zuckerman's weekend piece in the Wall Street Journal--revealed one of the stubborn realities of current market conditions.

Here's Zuckerman:

On Thursday, the Dow fell below the level reached in March, when brokerage firm Bear Stearns was fighting for its life, and now stands at levels not seen since September 2006.[*]

The good news is that the overall market now is beginning to look more attractive based on any number of metrics. For example, the S&P 500 now trades at a price-earnings multiple of about 15 times this year's expected earnings.

The 10-year average is 18.7, covering a period of investor exuberance, as well as the 2000-2002 market downturn. The 24-year average P/E ratio is 15, and that includes a period of much higher inflation than now. That all suggests that the market is reasonably priced, though not yet at bargain-basement levels.

Yes, but...

Other measures are more ambiguous. Because future earnings are harder to get right, some look at profits over the past 12 months. On that basis, the price-earnings ratio of the S&P 500 is 21, compared with a long-term average of about 16, according to Birinyi Associates.

This is the big question, at least for equities' medium- and long-term prospects: Where are earnings headed?** What of the potential gap between actual and reported earnings? If corporate earnings fall, will traders and investors take the market multiple lower as well, resulting in a double blow to equity prices?

From where we sit, the probabilities aren't especially bullish. But Zuckerman's  piece reveals just how important one's perspective is at times like these. If backward-looking valuations aren't cheap, and forward-looking estimates are too rich... well, you get the picture.

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* Some perspective: As of Friday, the S&P 500 had returned to the level it reached at the beginning of 1999, 2001, and 2006.

** In the short run, the market will be, as ever, a function of animal spirits, fiscal and monetary policymaking, and a grab-bag of pure contingency.

Source

Gregory Zuckerman, "Snatching Bargains From Bear's Jaws," Wall Street Journal, June 28, 2008