When trying to determine the correct valuation for stocks, several different criteria are evaluated. Some of these include: Overall economic growth / strength, expected earnings, expected growth rate of those earnings going forward, predictability / reliability of the expected earnings, level of interest rates, and other investment options available at the time.
Overall economic strength has a major impact on equity valuations. A strong economy will allow most companies to increase earnings, and give management confidence to grow their business. Under normal conditions, the economy changes very slowly, and we look for slight changes in quarterly economic reports to try and sense slow changes in trends. It has not been difficult to see the changes the past few weeks!