[jyl]

The stock market has been taking a header for an unhappy combination of reasons.

First, losses from subprime debt became dramatic (crystallized by Bear Stearns admission that its two subprime debt hedge funds, managing what used to be $1.5 billion of investor money, had become worthless). This is making investors sharply pull back their willingness to buy speculative debt. That in turn jeopardizes numerous M&A deals and private equity buyouts, which depend on huge debt issuance. The market has been fueled partly by these deals. In general investors are becoming more risk averse.

Second, the news about the housing market keeps getting worse, and appears to be extending beyond simply subprime borrowers. Consumer spending is already weak, and investors fear the impact of tightening credit standards on everything from prime mortgages to home equity loans to credit cards to auto loans. On top of high energy costs.

Third, this has not been a good earnings season. In 1Q07 consensus estimates were for S&P500 earnings to grow +3% and they actually grew +8% (all these numbers are approximate, from memory). In 2Q consensus was for +3-4% and actuals are coming in around only +4-5%. Numerous bellwether companies are missing consensus estimates (XOM being an example) and many of the rest are guiding 3Q below consensus.

[EDIT: Earnings reports improved later in the earnings season and right now actuals are around +8-9%.]

Fourth, the market had run up so strongly since March that traders had a lot of recent profits to protect (profit-taking).

About analysts' estimates, the basic idea is that the value of a company is the dscounted value of its future cash flows, so investors try to estimate future earnings to determine what they are willing to pay for the stock. In most cases those estimates are based on company management's guidance (kc911 take note) When a company misses estimates, it means that something is going badly in the company's business and/or that management isn't telling investors the accurate facts about the business. Some investors extrapolate the bad news to future quarters and even future years, which brings down their valuation of the stock. That is the theory, anyway, the practice is a lot messier and more complicated and less rational.