Given events and market gyrations do you think we could see a drop to the long term CAPE average of 16-17PE this would suggest S&P at 3400-3600.

Well, I think anyone expecting valuations to return to pre-2000 norms is likely to be disappointed. It really is different this time, I believe, so it's mainly a question of HOW different.
I do my own smoothing of real earnings, very similar to CAPE, but a bit smoother. So, considering only the modern era:
If the valuation were the same level as the average since 1985, the S&P 500 would be at 3646 today, a drop of -37.8%
If the valuation were the same level as the average since 1990, the S&P 500 would be at 4040 today, a drop of -31.1%
If the valuation were the same level as the average since 1995, the S&P 500 would be at 4322 today, a drop of -26.3%
If the valuation were the same level as the average since 2000, the S&P 500 would be at 4230 today, a drop of -27.9%
If the valuation were the same level as the average since 2005, the S&P 500 would be at 4142 today, a drop of -29.3%


The big monkey wrench in the process is that US corporate net margins have really soared in the last 15 years or so, to previously unheard-of levels. As a result, even a chart of extremely smoothed real earnings has bent upwards, like the climate hockey stick graph. The figures above implicitly assume that the current point on the trend is itself sustainable and appropriately cyclically adjusted, which might not be the case. All those figures above may be too optimistic if net profit margins fall at all in the direction of historical norms.

There are some nice articles explaining how this is the almost unavoidable flip side of large government deficits (among other side effects). It kind of falls out of the macro equalities. So, is the US deficit ever going to fall to old (late 20th C) normal levels? If so, then so will US profit margins, broadly speaking. Meaning the trend of extra-fast earnings growth is going to end, perhaps go into reverse for a while.

Statistics be damned, sometimes it's much easy to predict one company than the broad market.

Jim