What will the S&P 500 return in 2015? The Economist's William Gibson said "The future is already here – it's just not evenly distributed."
Meaning? We can use a distribution of outcomes from the past to point us in the general direction of future 2015 returns, but there is no certainty. The bad news is most likely - current prices and earnings suggest caution and that strong positive returns for the S&P500 in 2015 are not likely. This considers the 10-year average of inflation-adjusted earnings and the Cyclically Adjusted Price Earnings Ratio, or as one blogger calls it "P/E10".
The 2014 year end P/E10 ratio was 26.8. This puts S&P500 prices in the overpriced, overvalued top band of the historical distribution of P/E10 ratios (i.e., the 5th quintile band of 21.2 - 44.1 in the chart below). As dshort puts it, "By this historic measure, the market is expensive, with the ratio approximately 61% above its average (arithmetic mean) of 16.6"
So based on recent earning and prices, and the distribution of past outcomes, in 2015 the S&P 500 has more room to drop than to go up. When the P/E10 ratio is as high as 26.8 prices can go up - in the past 20 years they increased to 44.2 into the Tech Bubble. But that was eventually followed by a P/E10 of 13.3 .. .a drop of 50% from where we are now.