Barry Ritholtz at The Big Picture demonstrates how vulnerable stock indexes are to fairly slight revisions to earnings expectations and multiples. Many strategists have been relatively bullish on stocks, estimating that companies within the S&P 500 could generate earnings of $94 (U.S.) a share in 2012. If investors are willing to pay 15-times for those earnings, then the target for the S&P 500 moves to 1,400.
Ah, but look what happens when you make a few quick adjustments. If earnings come in a $84 a share instead (a $10 haircut) and the market decides to pay a more modest 12-times for those earnings, then the target for the S&P 500 falls to 1,020. Approaching midday activity on Wednesday, the index sat (wrong verb: how about “squealed”?) at 1,130.