Citi's Panic/Euphoria model has a pretty extraordinary track record for predicting returns.

It's a contrarian indicator, which means a "euphoria" signal is bearish and a "panic" signal is bullish.  According to Citi, the model's components include "NYSE short interest ratio, margin debt, Nasdaq daily volume as % of NYSE volume, a composite average of Investors Intelligence and the American Association of Individual Investors bullishness data, retail money funds, the put/call ratio, CRB futures index, gasoline prices and the ratio of price premiums in puts versus calls."

And currently, the model dangerously close to euphoria territory, reaching its highest level since 2008.

"The Panic/Euphoria Model is sending a clear warning sign of substantial complacency," said Citi's Tobias Levkovich in a note to clients today. "The investment community’s mindset is widely monitored and investors anecdotally have become more bullish in conversations and meetings looking to an expected traditional late-year seasonal rally, despite a better than 20% move year-to-date."

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One of the more reliable indicators of stock market sentiment is Citi's proprietary Panic/Euphoria model.

"This week’s Panic/Euphoria reading was 0.52; versus last week’s revised number of 0.49, which points to two weeks in a row of euphoric signals, matched by increased money flows," said Citi's Tobias Levkovich in a note to clients on Friday.

This is a contrarian indicator, which means euphoria is a bad sign for things to come.

"Euphoria readings indicate the market may retreat with an 83% historical probability of losses in the next 12 months," added Levkovich.

Most measures of sentiment rely on surveys of investors. However, Citi's Panic/Euphoria model relies heavily on market based measures that are believed to reflect sentiment. Components of the model include NYSE short interest ratio, margin debt, retail money funds, the put/call ratio, gasoline prices and the ratio of price premiums in puts versus calls"

"Euphoric sentiment raises deep concern."

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We've all seen this chart before. It's corporate profits as a percentage of GDP.

The implication is that record high profit margins are an anomaly thanks to too few workers working too many hours for too little pay.

Stock market bears warn margins are doomed to revert to some long-term average. And ultimately, this is also supposed to translate into collapsing earnings, which would cause stocks to tank.

However, stocks and are not the economy.

And Citi's Tobias Levkovich takes issue with those who compare stock market measures to U.S. economic measures.

"Market cap to GDP measures also miss out on the growing impact of foreign earnings from non-US GDP sources making that approach far less useful as well," wrote Levkovich in his weekly note to clients. "Because corporate profit as a proportion of GDP is at a 65-year record high, there is a legitimate view that margins are so stretched that they can only go down."

"[B]ut this ignores the earnings growth coming out of S&P 500 constituents from international sources that may have been produced internationally and do not even enter the US GDP calculation," he added. "Similarly, high margins also reflect sales outside the US that were produced outside the US even though the profits accrue to US entities (which may not be repatriated and thus tax rates are much lower). As a side note, both the national income account profit margin data and the GDP figures include privately held companies that are not represented in the S&P market cap, but that issue never gets addressed by the critics."

Profit margin bulls acknowledge that margins are historically high, and most agree that there will be some give back especially if there's a recession.

However, all margin bulls agree that margins are on a secular upswing thanks to increasing overseas exposure among other things.

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The 2013 mega-rally in the stock market caught Wall Street's top forecasters completely by surprise.

And despite just recently publishing their 2014 targets, Wall Street is already being forced to revisit their analyses as the market continues to surge to new all-time highs.

Citi's Tobias Levkovich, who published near-term stock market predictions in May and 2014 targets in September, just revised his forecasts.

"The S&P 500 has basically achieved its mid-2014 target as tapering delays and fiscal progress have contributed to lower risk premiums and higher P/E multiples," wrote Levkovich. "When laying out a 12-month view in May 2013, the notion of 1,800-1,850 on the S&P 500 by June 2014 was considered likely, but these gains have been pulled forward into 2013."

Levkovich now sees the S&P 500 hitting 1,975 in 2014, up from his previous target of 1,900.

"The good news from credit conditions, hiring intentions and capital spending plans on the economy and likely earnings growth can provide upside appreciation potential while sentiment, intra-stock correlation and even valuation suggest concern," added Levkovich. "Overall, we can get to a 1,975 kind of outcome, but we may also see choppier markets and early indicators on volatility also intimate reasons to be worried."

So while he remains longer-term bullish, he is cautious about the near-term.

"The potential for a 5%-10% correction in 1H14 is significant given the likelihood for greater volatility, euphoric investor sentiment, political challenges and the pull forward of equity returns into 2H13," he wrote.

Despite these changes and uncertainties, Levkovich's long-term bull thesis is unchanged.

"Our Raging Bull Thesis, initiated more than two years ago, argued that a new multi- year secular bull market was expected to begin in 2013 and that view remains intact," he wrote. "Certain aspects of the theory such as positive demographics, the shale gas revolution, US cost competitiveness and required technological mobility investment can last for the better part of this decade and into the 2020s and thus argues for many more years of stock market appreciation."

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2013 was a huge year for stocks. The S&P 500 surged 30%.

Meanwhile, gold had its first annual loss in a dozen years, tumbling 28%.

Citi's Tobias Levkovich thinks the divide between these two asset classes can widen further.

"Despite the inverse performance of stocks and gold in the past year, equities look poised to continue outpacing the yellow metal in the years ahead," wrote Levkovich in his January Chart of the Month note. "When the S&P 500 hit its tech bubble driven highs in 2000, its relative gains were more than one standard deviation above average trend and that is not the case now. Indeed, there still appears to be a fair amount of room for the recent relative price pattern to continue as the bounce off of more than one standard deviation below trend has only just begun."

Levkovich charted the S&P 500 priced in gold. This ratio most recently bottomed in the fall of 2011, which sent a signal to BI's Joe Weisenthal that the global economic crisis had ended.

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The stock market continues to hit new highs while experiencing very little volatility and few notable sell-offs. The CBOE Volatility Index — aka the VIX, aka the "fear gauge — closed on Friday at 11.3, its lowest level since March 2013.

All of this has some experts freaked out that complacency has run rampant, making markets more vulnerable and sensitive to bad news.

While this might be true, history shows that a low VIX isn't a great reason to dump stocks. Sure, the VIX may eventually move higher as market volatility returns. But there's little indication that it'll happen soon.

"Looking back at volatility data reveals that there are much higher probabilities for market gains when the VIX is sitting between 10 and 15 than when it is in the 20-25 range," said Citi's Tobias Levkovich during a luncheon earlier this month.

Since 1990, a VIX at current levels saw positive returns over 3-month periods 75% of the time, 6-month periods 86% of the time, and 12-month periods 88% of the time. The average 12-month return was 11.1%.

For those looking for short-term trades based on the VIX, the best opportunities seem to occur when it falls below 20 or jumps above 30.

To be clear, Levkovich's market outlook doesn't rely on the VIX alone.

"We continue to think that a 1H14 correction (in the 5%-10% range) is possible given weak EPS forward guidance trends and previous euphoric investor sentiment, not to mention the impact of the yield curve's shape on future market volatility," he said. "While credit conditions remain favorable in the US, disappointment in emerging economies and a lackluster though improving Europe could hold back the earnings story. Admittedly, better hiring intentions are encouraging. Plus stock buyback activity has stepped up and money has begun to flow into equity funds. With a 1,975 S&P 500 target by year-end 2014 driven by EPS gains as economic conditions improve next year, we remain generally constructive longer term while continuing to advise nearer-term tactical caution."

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Citi's Tobias Levkovich has raised his year-end target for the S&P 500 to 2,000, from his earlier target of 1,975.

"Large cap US equities are approaching year-end targets more rapidly than had been anticipated, supported by respectable earnings," wrote Levkovich. "With the S&P 500 up 4.4% year-to-date and our late 2013 expectation for a 2014 full-year gain of about 7.0%, it seems appropriate to reconsider the market outlook especially in the face of better-than-expected profits."

The S&P is at around 1,935 right now.

Here's Levkovich's expectations for S&P 500 earnings:

• 2014 EPS: $118.20 (up from $117.75)
• 2015 EPS: $126.70 (up from $126.00)

He sees the index rallying to the "2,040-2,060 range (or a single point figure of 2,050)" twelve months from now.

"The bigger challenges facing investors in 2015 might involve a significant change from the Fed and Chinese economic trends," he said. "It is reasonable to wonder about a forthcoming tightening in monetary policy once tapering is done with and the focus shifts to rate hikes. The timing and intensity of such moves will be somewhat dependent on inflation pressures and there is also concern about the impact of any rate hikes on emerging economies."

Levkovich does not expect this to be a smooth ride up. According to the Panic/Euphoria model, Citi's proprietary measure of market sentiment, there's an 80% chance the market will be down during this period.

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With stock prices surging in the biotech and internet sectors, some worrywarts can't help but freak out about the possibility that we're reliving the bubble of the dotcom era.

It certainly didn't help when Federal Reserve Chair Janet Yellen warned that valuation metrics in these sectors "appear substantially stretched."

Butmostmeasuresshowthat the broad markets and industries are nowhere near the ear-popping levels of the Technology, Media and Telecom (TMT) bubble of 2000.

In a 13-page note titled "Blowing and Bursting Bubbles," Citi's Tobias Levkovich offers a good discussion of past bubble cycles.

But one chart from his August 1 offered some eyeopening perspective. Here's his comment for context:

In the late 1990s, the TMT bubble expanded, with the combination of the IT sector along with Media stocks and the Telecommunications Services sector culminating with a near 40% composition of the S&P 500 market cap entering 2000. Valuations were through the roof within Nasdaq relative to the S&P 500 (see Figure 1) indeed, the Nasdaq 100 was trading at more than 100x forward EPS in late 1999. The notions of a New Economy unburdened by typical economic cycles became the rage and risk premiums collapsed to near nothing.

That was then.

Today, valuations in the Nasdaq are nowhere near those literally off-the-chart levels.

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Of the 14+ Wall Street strategists followed by Business Insider, not one predicted the S&P 500 would be where it is today.

In fact, the most bullish strategist at the beginning of the year — Citi's Tobias Levkovich — had a target of 1,615.

Today, the S&P 500 is sitting at 1,775 after starting the year at 1,426.

Levkovich, who rarely tweaks his forecasts during the year, included this chart of the Wall Street's evolving consensus forecast for the S&P 500 in a Nov. 29 note to clients.

Despite their constant revisions throughout the year, Wall Street is still below today's 1,775 level, which is literally off of this chart.

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Stock prices relative to earnings are very expensive. This is reflected by the high price-earnings (PE) ratio.

One closely-followed version of the PE ratio is Robert Shiller's cyclically-adjusted price-earnings (CAPE) ratio, which is calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings.  If the ratio is above the long-term average of around 16x, the stock market is considered expensive.

CAPE is currently at 26x, a level last seen during the dotcom bubble and, before that, the crash of 1929.

Therefore, we must be doomed, right? Not necessarily.

"The so-called CAPE, popularized by Professor Shiller of Yale is extended but unfortunately has no ability to predict stock price outcomes a year later," Citi's Tobias Levkovich said on Friday. "Yet, that does not seem to confound the bears, which we find both intriguing and revealing about motive rather than study."

To illustrate his point, Levkovich reviewed the 12-month return of the S&P 500 after the index hit various CAPE levels in history. (See chart)

Intuitively, you'd think that a high CAPE would be followed by low or negative returns, while a low CAPE would be followed by higher positive returns. This would manifest as blue dots going from the top left to the bottom right.

By eyeballing it, it's obvious the trend is not clear.Levkovich tested the relationship between CAPE and 12-month returns using R², which reveals how well a regression line — the line of best fit you see — explains the relationship.

The R2 was a very low 0.06, indicating that there is essentially no statistically sound relationship. In other words, Robert Shiller's revered stock market valuation ratio is crappy at predicting 12-month returns.

The thing is, Robert Shiller is aware that CAPE does a terrible job of telling traders when to buy and sell stocks. He explained to Business Insider's Henry Blodget two years ago.

John Campbell, who’s now a professor at Harvard, and I presented our findings first to the Federal Reserve Board in 1996, and we had a regression, showing how the P/E ratio predicts returns. And we had scatter diagrams, showing 10-year subsequent returns against the CAPE, what we call the cyclically adjusted price earnings ratio. And that had a pretty good fit. So I think the bottom line that we were giving – and maybe we didn’t stress or emphasize it enough – was that it’s continual. It’s not a timing mechanism, it doesn’t tell you – and I had the same mistake in my mind, to some extent — wait until it goes all the way down to a P/E of 7, or something.

In other words, don't dump stocks and hide in cash because the CAPE is at 26. Rather, just be prepared lower average returns for years to come.

Ultimately, a PE ratio is just not a good tool for predicting 12-month returns. Having said, it's probably best not to play the game of predicting 12-month returns.

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"Over the past 10 years, S&P 500 constituents have bought back nearly $4 trillion of stock while investors have added cumulative inflows of less than $100 billion to US equities via mutual funds and exchange traded funds," Citi's Tobias Levkovich said in a note to clients today.

This is not news. But it continues to be a jarring reminder of how stock market mania hasn't permeated Main Street America. Mom and pop just don't care.

"The lack of US retail investor interest in stocks has been stunning and equity market tops usually consist of overly aggressive individual investor interest in the asset class," Levkovich continued. "In this context, it is challenging to suggest that the S&P 500 is due a major correction barring exogenous shocks."

Levkovich has a year-end S&P 500 target of 2,200.

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The stock market is at an all-time high, and milestones like this make investors hungry for guidance.

On Friday, Citi's Tobias Levkovich introduced a new 12-month target for the S&P 500.

"Improving hiring intentions, wage lead indicators, the impact of oil price declines, some reflation abroad and still supportive credit conditions all suggest that equity markets should climb further in 1H16," he wrote. "The pace of monetary policy 'normalization' will need to be monitored, yet a mid-2016 S&P 500 target of 2,300 looks reasonable, though any new interest in US stocks by the general public or global investors who prefer QE-driven indices, could lead to even higher US stock levels."

That's an 8% gain from current levels, which seems pretty bullish considering the fact that the S&P 500 is up 220% from the March 2009 low.

But what about the elevated price-earnings multiple, which the market bears frequently point to?

Levkovich thinks that you can't just bank on one measure alone.

"[T]he more critical issue might be that the proof point cannot be a single chart but rather a series of data that generates a preponderance of evidence rather than an opinion built on a single data point," he said, noting that his target is based on ten inputs including consumer confidence, the VIX, earnings growth, as well as the price-earnings ratio.

But what about the prospect of tighter monetary policy via rate hikes from the Federal Reserve?

"[S]uggesting that the Fed’s first rate hike will spell doomsday for equities certainly makes for attention-grabbing headlines but the history of S&P 500 reactions over the past 60 years yields a far different and more positive stock price outcome," he noted.

Indeed, history shows that stock prices tend to rise during the months leading into and months following an initial rate hike.

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The number of Baby Boomers' children will be greater than the number of boomers themselves, which Citi's Tobias Levkovich sees as a bullish trend for stocks.

His basic argument is that as these Baby Boomers' kids enter the 35-39 age range — aka the age when people have bought their first home, have a few kids — they'll start saving aggressively in the stock market.

"The Baby Boom generation powered the 1980s and the 1990s bull market run — Generations X and Y could drive the current decades upside opportunity," according to Levkovich.

In his 17-page note to clients, Levkovich made a comprehensive, multi-faceted case for why demographic trends were favorable for stocks.

"Some estimates suggest that more than $40 trillion of wealth will be transferred by 2060 from aging Americans to their offspring and grandchildren, with the potential for continued consumption at a more impressive pace than is generally expected," he added. "Despite the two major equity bear markets of the past 15 years, equities still offer investors better upside potential than bonds and it seems improbable that shareholders will be sellers as indices achieve new highs, if history is any guide."

Levkovich has been vocal about this bullish demographic trend for almost five years.

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Investors are worried about what the aging of baby boomers means for the markets.

Specifically, they're concerned baby boomers will pour out of stocks and into bonds to reduce risk profiles throughout retirement. This would be bad news for the stock market.

But BMO Capital's Brian Belski highlights another demographic trend that could counter the negative effect from the baby boomers.

"[W]e believe these investors are ignoring an even more important demographic trend," Belski wrote. "Specifically, the size of the baby-boom echo (children of baby boomers aged 30 through 39) will be growing meaningfully in the coming years, and growth in this cohort has historically had a direct impact on stock-price levels."

Citi's Tobias Levkovich has also been vocal about this bullish trend. He argues that as these baby boomers' kids enter the age bracket in which most people buy their first home and have a couple of kids, they'll start saving aggressively in the stock market.

"Some estimates suggest that more than $40 trillion of wealth will be transferred by 2060 from aging Americans to their offspring and grandchildren, with the potential for continued consumption at a more impressive pace than is generally expected," Levkovich added. "Despite the two major equity bear markets of the past 15 years, equities still offer investors better upside potential than bonds and it seems improbable that shareholders will be sellers as indices achieve new highs, if history is any guide."

Looks as if demographic trends may net positive in the longer-term stock outlook.

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When you see the value of your investments drop before your eyes, your brain sends a funny feeling into your belly that makes you panic and want to "Sell!"

With the global rout we're experiencing right now, that's a feeling that a lot of investors and traders may be getting.

While there's no guarantee that prices won't fall further, history shows that it's moments like this that prove to be the best times to buy.

"Be fearful when others are greedy, and be greedy when others are fearful,"Warren Buffett says.

This is what's called a contrarian strategy.

One of the more popular metrics used by contrarians is Bank of America Merrill Lynch's proprietary "Sell Side Consensus Indicator," which measures bullishness and bearishness among professionals based on how they're recommending clients allocate stocks in their portfolios. When many of them recommend avoiding or staying underweight stocks, this is a reflection of bearishness. And as a contrarian indicator, this is interpreted as a signal to buy.

According to BAML's Savita Subramanian, this indicator isn't screaming extreme bearishness, but it's at the far bearish end of neutral.

"[T]oday’s sentiment levels are still near where they were at the market lows of March 2009 and over 12pts from the level of extreme bullishness that would indicate a contrarian “Sell” signal in our model," Subramanian wrote in  a note to clients on Tuesday. "Strategists are still recommending that investors significantly underweight equities, at 54% vs. a traditional long-term average benchmark weighting of 60-65%."

"With sentiment still near the bearish end of the “Neutral” range of our model, implied 12-month returns are still very robust at +17%," she added.

Citi's Tobias Levkovich was on Bloomberg TV Monday afternoon discussing Citi's proprietary "Panic/Euphoria Model," which is a model that factors in nine metrics like the NYSE short interest ratio, margin debt, Nasdaq daily volume as % of NYSE volume, the put/call ratio, AAII bullishness data, and others.

"Statistically, you’re talking about a 96% probability that markets are up 12 months later," Levkovich told Bloomberg's Alix Steel and Scarlett Fu.

In a note to clients in August, this level of panic has seen an average 12-month return is 17.5%.

Barclays Ian Scott also circulated a note to clients noting the collapse in sentiment as measured by the Investors' Intelligence survey.

"Sentiment towards stocks is now firmly below average, with just 9% more bulls than bears," Scott wrote. "While we would be the first to acknowledge that sentiment does not have a “call” on the market before 2009, in the post Financial Crisis environment, it certainly has. Indeed, whenever the percentage of bulls has dropped below 9.5% the market has consistently been higher 6 months later, with an average gain of 22%."

Ultimately, you'll want to think carefully before making any investing decision. What you see above is just the history.

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Budget drama threatens to rattle the confidence of investors as the US Congress once again scrambles to get its fiscal house in order.

But that's arguably a sideshow to a much bigger problem faced by companies in the US stock market: weak earnings.

"Politics aside, [third quarter] earnings season could prove turbulent given recent macro developments," Goldman Sachs' David Kostin wrote on Friday.

"For a second consecutive quarter, economic turmoil in China alongside mixed US economic activity and a generally strengthening dollar will likely weigh on corporate results."

Earnings are the most important driver of stock prices. Stock prices, for their part, have already experienced heightened volatility lately, with the S&P 500 now down over 8% for the year.

And lately, earnings growth has flattened out and expectations are for growth to actually go negative in coming periods.

In a video released early Tuesday, billionaire investor Carl Icahn observed that corporate earnings were looking fragile, and he questioned whether there would be any buyers as investors look to dump stocks.

Kostin believes that volatility could be exacerbated by the fact that buybacks of corporate stock, which have helped fuel the bull market, are expected to scale back in the coming weeks.

"Most S&P 500 firms have already entered their buyback blackout windows, and are therefore prevented from executing discretionary buybacks beyond the automatic share repurchases taking place through 10b5-1 plans," Kostin said.

Wall Street is slashing its outlook for stock prices.

In a follow-up note on Monday, Kostin cut his year-end target for the S&P 500 to 2,000 from 2,100. He joins peers at RBC Capital, Bank of America Merrill Lynch, Credit Suisse, and Deutsche Bank, who have all cut their targets for the S&P in recent weeks.

In addition to economic concerns, Kostin pointed to elevated valuations (i.e., the price-earnings multiple) during a time when the Federal Reserve is about to tighten monetary policy. Goldman Sachs' house view is that the Fed will raise policy rates on December 16.

"Historically, rising short-term interest rates have been associated with declining P/E multiples," he wrote.

This is not new.

Strategists including RBA's Rich Bernstein and HSBC's Ben Laidler have argued that the Fed could be a problem as earnings-growth expectations have flattened out and, as Kostin noted, interest-rate hikes are associated with investors wanting to pay less for earnings growth.

Kostin, however, sees earnings growing. In 2016, he sees S&P earnings per share climbing to $120, bringing the index to 2,100 by year-end.

Guidance will be key

Nobody likes volatility. But sell-offs could prove to be buying opportunities for forward-thinking investors. And investors and traders may quickly bid up prices if they feel as if the outlook for is rosier than what the market is pricing in.

"A focus on guidance and insight into EM business activity could prove crucial for subsequent stock price performance," Citi's Tobias Levkovich wrote on Friday.

"It is our opinion that the earnings guidance coming out of the reporting season is likely to be a bit better than the current agitated zeitgeist presumes," he continued.

"Indeed, the rolling 10 weeks of guidance has shown some improvement in terms of the percentage of companies providing upward views and we suggest that few investors really can relate to that development. There tends to be a more attuned ear to confirm existing beliefs (in order to avoid cognitive dissonance) and thus positive news gets looked over if in conflict with the prevailing predisposition."

So, while Kostin warns of volatility, Levkovich sees potential opportunity.

"We suspect that some investor confidence can build from earnings in the next few weeks rather than confirm the current negative slant," Levkovich said. "Accordingly, we sense upside opportunity especially in the face of such negative investor sentiment."

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Surging yields in the junk bond market have everyone nervous that it's going to get a lot tougher for businesses to access financing.

For the most part, surging junk bond yields have largely been due to surging yields in the market for energy bonds, an industry that's seen cash flow tank as oil prices crashed.

For now, many indications suggest that it is still pretty easy for businesses to borrow cheaply.

"Investors get appropriately worked up by the higher financing costs found In the junk bond world but they also need to track small business credit availability to see if the thus far contained energy sector related high yield issues are spreading," Citi's Tobias Levkovich writes. "Fortunately, Figure 5 illustrates that the small business pressures have not emerged and one needs to see both the high yield market and small business credit environment to worsen to drive a recession as was seen in 1989-90, 1999- 2000 and 2007-08."

"Two percent of owners reported that all their borrowing needs were not satisfied, a record low,"the NFIB explained. "Thirty percent reported all credit needs met, and 57 percent, a record high, explicitly said they did not want a loan."

And it's not just small businesses where lending appears to be readily available.

"In addition, the senior loan officers' survey for business loans does not underscore the stress normally associated with an imminent recession," Levkovich added.

 Historically, however, the senior loan officers' survey tends to follow what's happening in the junk bond markets. In other words, while lending may be easy now, tougher lending conditions may be on the horizon.

For Levkovich, he would just say to be wary of the non-energy companies complaining about tough conditions today.

"These data points do not argue that worse credit figures are not coming down the pike, but they have not arrived yet, implying that some management teams may be crying wolf to cover up their judgment errors," he said.

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One of the bigger themes since the financial crisis has been the fattening of corporate profit margins as businesses across America hacked away at their cost structures and squeezed more out of their existing resources.

But with the economy rebounding and putting people back to work, the labor market has gotten much tighter. And today, that's manifested in the form of wage growth as companies are being forced to raise pay in order to recruit and retain talent.

And as the business cycle proceeds, wage growth will eat into profit margins in a big way.

"Investors are appropriately worried about margins falling more sharply given that labor costs account for more than 60% of corporate expenses and small companies need to lift employee compensation but do not seem to have pricing power to offset related higher expenses," Citi's Tobias Levkovich said.

Now, much has been written about how turns in profit margins signal recessions.

But Levkovich isn't that concerned about that as of yet.

"Fortunately, the conditions do not seem set for an economic downturn given that small business still has access to credit and continue to look to hire more workers," he noted. "Furthermore, rising compensation costs are not that problematic for EPS growth as one could see some top-line acceleration from stronger consumer spending tied to more worker income and pent-up demand."

Levkovich is positive on the stock market. He sees the S&P 500 heading to 2,300 by mid-2016. On September 4, he introduced a 2016 year-end target of 2,200.

"We remain generally constructive longer term while advising investors to buy on weakness rather than chasing the tape," he said.

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This summer, six years into the current bull market, one of the biggest concerns we heard repeatedly was that valuations were looking rich.

As measured by the price-to-earnings ratio, or PE, the market multiple had been well above average for months. And depending on how you measured earnings and how you calculated your average, you could argue that the multiple had been above average for years.

It was at a level that had many reluctant to buy stocks. And it had some even recommending selling stocks.

And then August happened. Stocks came crashing down as the sum of many fears seemed to be coming to a head. China had unexpectedly devalued its currency, and markets came tumbling in what appeared to be confirmation of the bearish signal telegraphed by the ongoing rout in commodities.

It was around that time that in a period of two or three days a couple of analysts all flagged the same metric: the PE ratio.

• "The valuation correction does seem in place," Citi's Tobias Levkovich said in an August 24 note.
• "S&P valuation back to normal," Deutsche Bank's David Bianco said in an August 25 note.
• "The forward PE is 15X currently, lower than the implied PE of corporate bonds (inverse of yield) and barely above HY (which is barely at a discount),"FundStrat's Tom Lee said in an August 25 note. "Stocks are -0.6 standard deviation from long-term average, or cheap."
• "The S&P 500 PE ratio fell to 15.5x, a level not seen since October of last year,"Barclays' Jonathan Glionna wrote in an August 25 note. "As shown in our poster report titled Is 17x earnings expensive?, the S&P 500 total return for the next 12 months has averaged over 11% and 20% for PE ratios of 15x and 16x, respectively."

And so on August 26, we published "One good thing has come from the stock market rout." It was an opportunity for all the valuation worrywarts who were reluctant to buy with valuations so high.

That day, the S&P 500 opened at 1,872. This was the same week the index set its 52-week low of 1,867.

Today, the S&P is near 2,060, up 10% in just four months.

Admittedly, we are cherry-picking posts here. And while we are not in the business of giving investment advice, we can comfortably recommend that you do not trade on any single post you read on BusinessInsider.com.

Having said that, if you read Business Insider, subscribe to the Markets Chart of the Day email, or follow @chartoftheday on Twitter, you can't exactly say you didn't know this correction in valuations occurred.

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For investors in the stock market, nothing is more important than earnings.

In the long run, earnings and the expectation for earnings growth is what gives stocks their value.

In the short run, there is a wide variety of forces that can affect market pricing and sway investor sentiment. These forces include anything from the timing of stock buybacks to the fear of terrorism.

This time around, however, short-run concerns about earnings may arguably be the catalyst for the recent bout of volatility in the stock market, which has seen the S&P 500 tumble 8% in the past two weeks.

“Notably, institutional investors were worried about earnings in our late 2015 client survey (see Figure 9) and they have been proven right as was the likelihood for a pullback over a rally,” Citi’s Tobias Levkovich said on Thursday.

And it's all about the ongoing crash in oil prices.

“The near 20% decline in crude prices year to date is forcing additional cuts to the earnings outlook,” Levkovich said. “While the Energy sector contributed an estimated 5%-6% of overall S&P 500 EPS last year, it could plunge another 40% this year. Thus, we are trimming $2.00 from our prior 2016 forecast to $126.50. Thus, the profit growth outlook is cut back to around 5% from the previous 7%.”

Levkovich joins his peers at RBC Capital, Deutsche Bank, and Goldman Sachs who have all warned clients about the costly toll of tumbling oil prices.

"With earnings estimates dipping back, it is fair to imply that the S&P 500 will not achieve the 2,200 year-end 2016 target that was projected last September but be more like 2,150 (and 18,500 on the DJIA)," he said.

You can blame the Fed, or China, or whatever for exacerbating volatility in the markets as risk premiums spike. But when it comes to fundamentals, nothing is more fundamental to investors than earnings, and the outlook for earnings is not looking good.

SEE ALSO: Profits aren't actually growing, companies are just fudging the numbers (Aug. 17)

ALSO: This is a problem — the earnings cycle is rapidly maturing (Aug. 18)

ALSO: The danger now is that commodity prices and equities re-correlate (Aug. 24)

ALSO: The most important driver of stock prices is finally rolling over (Sept. 22)

ALSO: The unsettling truth about why stocks rise during rate hikes (Sept. 25)

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