On April 29, the Dow (NYSEARCA:DIA) closed at 12810.54. Yesterday, just 28 trading days later, it was 5.6% lower. This was largely due to changed expectations of lower growth relating to wider economic conditions and their impact on the 30 Dow companies.

Using the Dow company closing prices, current earnings P/E, 1 year forecast P/E (*current closing price/next year’s forecast earnings*) and Dow weighting, a bottom up calculation was made to estimate some simple metrics for the Dow and to calculate how much lower growth was priced into the 5.6% decline in index value.

EPS is 7.3% of the value of equity (yesterday’s closing price). Year-ahead forecast earnings are 23% higher, at 8.9% of yesterday’s closing price. It is worth noting that only 3 out of the 30 companies had lower forecast earnings next year compared with current year: Coca Cola (NYSE:KO), Travellers (NYSE:TRV) and AT&T (NYSE:T). Only one company, Bank of America (NYSE:BAC) - with the lowest weighting in the Dow at 0.6648% - had no positive current year earnings but is forecasting earnings for next year.

Using the Dow historical range of 14 -16 P/E and assuming next year’s forecast earnings are all met, the Dow should be trading between 25% and 43% higher than yesterday’s close, or in rough terms between 1500 and 1700.

Of course P/E ratios are only a rough and ready guide to valuations, and as those numbers suggest, lead to some surprising and possibly dubious conclusions. History is not a guide to the future.

Growth adjustment | Value of the Dow |

0% | 12810.54 |

-0.50% | 12096.3 |

-1% | 10818.71 |

-1.50% | 9190.69 |

-2% | 7434.731 |

In terms of growth related to this year alone, recall that next year’s forecast return for the Dow is about 9%. If this is reduced by half to 4.5%, and in subsequent years the Dow returns to 9% EPS, this single year loss approximately equates to losing 0.1% annualised earnings growth when discounted at 9%. At such a value, the Dow index would trade at 12660.

**Disclosure:**I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.