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 columnist for Kiplinger’s, a “Market Master” on CNBC and regularly appears on Bloomberg, NPR, CNN and other national and international networks

I spoke with Jeremy on Monday, November 20th.

Our interview was on November 21 of last year, when the S&P 500 was at 2,182. On Friday it closed at 2,579. That’s a gain of 18.2%, which is consistent with the optimistic outlook you had last year. What is the fair value of the S&P 500 now and what is your outlook for the coming year?

We’re just about at fair market value. Lower interest rates justify a higher than average price-earnings valuation. A PE ratio of 18 to 20 is reasonable, given that interest rates have remained even lower than I anticipated. From what I see with earnings right now, we are basically there.

The Republican tax plan and the corporate tax cut are important to the market, and they will be the driving force over the next month or so. I expect next year to be a tougher time for the market, but not necessarily a decline. We’ve had a huge gain since 2009, one of the biggest bull markets ever. It will take a year to digest those gains.

When we spoke last year, you noted that S&P operating earnings were coming in approximately $109 per share. They are now approximately $122 per share. That’s an increase of approximately 11.9%, while at the same time PE ratios have increased from 20.0 to 21.1. Looking forward, do you expect future returns to come from multiple expansion or from increased earnings?

We are going to have some increased earnings with the corporate tax cut, but certainly not to the extent that we have seen this year. Earnings per share growth might settle down to a 5% per year average increase. We are looking at about 20.5 PE right now on 2017 S&P 500 operating earnings. Of course, we’ve got the fourth-quarter yet to go.

S&P predicts operating earnings of $144 next year. I can see $10 more than this year from the tax cut, but I have a hard time seeing another $10 on top of that. That’s way too high.

We have rebounded from the terrible earnings in 2015 that, as I pointed out then, were due to the oil price collapse. Obviously, we have seen an increase in the price of oil, which is now $56 a barrel. That’s a good rate for the U.S. It’s profitable for producers and yet low enough for users.