The risk of accidents

Growth downturns can expose vulnerabilities that increase market risks

There are two drivers of market downturns: Cuts to forward earnings estimates and a decline in the price-to-earnings (P/E) multiple that investors ascribe to them. A 15 per cent fall in earnings estimates and an 18 per cent lower P/E, for example, would mean a 30 per cent market correction. A reduction in P/E multiples usually drives the first part of a correction (as markets move ahead of changes to analysts’ forecasts), and cuts to forward earnings drive the subsequent declines.

Over the past year or so (the market peak varied from country to country), forward P/E multiples have corrected quite