The market volatility was again quite low today. This drop in volatility that occurred this week is bullish for equities in my opinion.
The market seems to see through the drop in earnings as an isolated energy related drop rather than a slowdown across multiple sectors. So although the S&P's valuation is elevated, it is mainly related to energy and not so excessive in the other sectors. The market seems to be pricing in a recovering in energy somewhat. Not a full bounce back, but more of a stabilization which should provide more confidence overall.
Some of the recent market strength has also been attributed to the return of the 'retail' type investors who seem to be back in full force. The 'retail' investor can propel the market higher and for a longer period than most professionals give them credit. Since the average investor seems to have finally shaken of the risk-aversion induced by the financial crisis, the market could have some room to the upside. It is difficult to judge how much the market could run since the valuation is already full. This final phase of the bull market is more a function of confidence than valuation or earnings.