Jeremy Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania and a senior investment strategy advisor to Wisdom Tree Funds. His book, Stocks for the Long Run, now in its fifth edition, is widely recognized as one of the best books on investing. It is available via the link on this page. He is a “Market Master” on CNBC and regularly appears on Bloomberg, NPR, CNN and other national and international networks

I spoke with Jeremy on Wednesday, November 21th.

Our interview last year was on November 20, when the S&P 500 was at 2,579. Yesterday it closed at 2,641. That’s a gain of 2.4%. Last year, you said the market was “about at fair value,” so you were not far off in your forecast, given that the average annual return has been about 9.8%. But, in fairness, you did say last year that 2018 would be tougher than was 2017, which it was. What is the fair value of the S&P 500 now and what is your outlook for the coming 12 months, including December of this year?

The market is trading at 15-times next year's estimated operating earnings on the S&P 500. That entails about a 12% increase from 2017 earnings, which I think is too high. The earnings increase next year might be much more modest, like 4% or 5%, which then gives us about 16-times earnings multiple.

"I think that 16-times earnings is, on a long-term basis, relatively cheap, as long as interest rates stay in the 3% range." For the long run, I believe the fair market value of the S&P is closer to 17- to 18-times earnings which gives us a 5% to 6% real return. This P/E multiple is higher than the historical average, because of all the liquidity in the market, the ability to get index returns and low interest rates. The equity risk premium is still pretty hefty compared to bonds.

We may now be below fair market value based on current earnings, but, next year we will be 10 years into an economic expansion. This expansion will likely break the record now held in the 1990s.

There are people talking about a 12- or 13-year expansion. Clearly, we are nearer to peak earnings than trough earnings, which means that we cannot always consider current earnings to be in a long-run steady state.

If the expansion continues, I assume that earnings are going to be $165 next year, $175 in 2020, and go up at a steady 4% to 5% a year. Then we should be at 18-times earnings. But if there's a possibility of recession and a 20% drop in earnings, you want to be a little bit more cautious. The current decline means the market is positioning itself for a potential recession.