If $\sqrt{x^2}$ can be simplified as follows:
$\sqrt{x^2} = (x^2)^\frac{1}{2} = x^{\frac{2}{1}\times\frac{1}{2}} =x^\frac{2}{2} = x^1 = x$
Then why would $\sqrt{x^2} = \pm x$?
If $\sqrt{x^2}$ can be simplified as follows:
$\sqrt{x^2} = (x^2)^\frac{1}{2} = x^{\frac{2}{1}\times\frac{1}{2}} =x^\frac{2}{2} = x^1 = x$
Then why would $\sqrt{x^2} = \pm x$?
Expanding on Mario G's comment, by definition, $\sqrt{a}$ where $a$ is any non-negative number is defined to be positive. So to the quantity $\sqrt{x^2}$ positive, we assign it the value $|x|$ because we don't know from the outset whether $x$ is positive or negative.
As for the plus-minus sign, that really doesn't occur when taking square roots, but rather when you solve equations. Consider the equation $a^2=x^2$. Now solving for $a$ will give you two solutions, $x$ and $-x$. But solving this equation is not the same thing as taking a square root on both sides, but something a little different. That's why $\sqrt{x^2} \neq\pm{x}$.
Because $\sqrt{x^2}$ can't be simplified "as follows." To be more precise: the notation $\sqrt{x^2}$ naturally designates a number $y$ such that $y^2=x^2$. Among real numbers there are two such $y$, namely, $y=-x$ and $y=x$. Your mistake is in extending the rule $(x^a)^b=x^{ab}$, valid for $a$ and $b$ integers, to allow $a$ and $b$ to be fractions.