The stock market overreached in 2013, expecting big things from 2014. Earnings estimates for 2014 were for growth of 10 percent-plus. High expectations boosted valuations above long-term averages.

When the Fed announced the reduction of its quantitative easing program in 2013, the market reacted with higher yields and lower stock prices.

Wall Street strategists observed this reaction and projected more of the same for 2014, seeing rising earnings, rising rates and falling valuations. Such is the natural course of late cycle markets.

Instead, earnings growth for 2014 will register closer to 5 to 7 percent, meaning valuations expanded even further to produce the 11 percent price gain in the S&P 500.

Why? Because even though the Fed tightened its policy stance in 2014, interest rates actually fell throughout the year.

While most observers expected the end of QE to lead to higher rates, it led to a dramatic rise in the dollar instead. Foreign purchases of U.S. securities surged, pressing down interest rates and pressing up valuations for U.S. equities.

The Fed’s tightening policy stance, when filtered through the currency markets, actually produced higher – not lower – U.S. stock market multiples.

Looking back at the two previous strong dollar periods provides useful perspective.

The U.S. dollar rallied 60 percent between 1980 and 1985. Earnings rose 11 percent over the time period while valuations rose 36 percent.

Between 1995 and 2002, the dollar gained over 40 percent. Earnings rose 17 percent over the time period while valuations nearly doubled.

Therefore, if the pattern of the last two dollar bull markets continued, valuations have plenty of room to run despite meager earnings growth.

Inevitably though, fundamentals reassert themselves for scrutiny. Analysts back in October expected fourth quarter earnings growth for the S&P 500 of 11 percent. Today they expect 3.5 percent.

Invariably, estimates for all of 2015 have declined due to the collapse in energy earnings and overseas profits, victims of the higher dollar. Absent currency effects, lower earnings matched with higher valuations makes the fundamental complex less appealing.

Valuations should correct to account for the slower pace of earnings growth.

However, if the dollar reprises its 2014 performance, money flows could turn a blind eye, continuing to press up valuations despite the weakening fundamental case.

Bottom line: In our view, the dramatic rise in the U.S. dollar over the back half of 2014 boosted the valuation of the S&P 500 above its fundamental equilibrium. As we enter 2015, earnings estimates for the S&P 500 are falling as a consequence of the higher dollar.

Investors, struggling to justify higher valuations amidst falling earnings estimates, have become skittish.

With fundamental investors cautious, the market will rely even more on currency cues as foreign buyers provide the marginal demand.

Unfortunately, global central banks are unabashedly manipulating currency values and attempting to forecast central bank strategies, interrelationships and press releases amounts to pure speculation.

This high uncertainty has stoked volatility, spooked buyers and precipitated the market’s decline.

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates