Price targets are starting to come down for a great many stocks these days, and that’s a reminder that analysts, who issue those price targets, essentially do the same thing you and I do: They try to figure out how much money a company is going to make in the future, and then decide what multiple on those earnings (or revenue, cash flow, EBITDA, or whatever) “the market” is going to be willing to pay a year from now.

The forecasts of future earnings usually don’t change wildly. Analysts are far from perfect, and they are sometimes dramatically off with their estimates, but on average they do a halfway decent job of estimating the near-term results when it comes to revenue and earnings (often because the company itself tells them what to expect). What changes faster and more dramatically is the multiple they use, the analysts’ assessment of what “the market” will pay for those earnings. Having your earnings forecast change from $1 to 90 cents may not be a massive change… the company is probably going to do about 10% less well than expected. But if analysts decide that investors will only want to pay 15 times earnings to participate in that story, not the 35X earnings they previously thought, that 10% shift in the real numbers could lead to a 60% drop in the price target.

And that signal isn’t magical, it’s not derived from great wisdom about what’s going to happen… it pretty much comes from the market. Analysts can’t really be expected to predict future sentiment very accurately, no matter how many spreadsheets and models they use, so they have to take their cue from stock prices: When prices are falling, they realize that investors are no longer willing to pay the multiples that had been prevalent in the recent past, so the analysts lower the multiples in their models, which means that even if the forecasted revenue or earnings are still rising, the stock price target is probably going to fall.

And analysts are human, too, and don’t want to look stupid or stand too far away from the comforting herd, especially during times of rapid change. Everyone is incentivized to get their estimates pretty close, but they’re also workers who have to go to the office every day and look their boss in the eye (OK, maybe on Zoom ...