The darkest moment of the US stock earnings cycle has not yet arrived

Our US equity strategy framework has several key components.

Overall earnings are often the most determinant of stock price movements. If a company's earnings beat current earnings estimates and show an accelerating upward trend, its stock price will tend to continue to rise before it gets too high. This is what drives bull markets most of the time - earnings expectations are steadily rising and will continue to do so for the foreseeable future.

But in a bear market, things are quite different -- earnings expectations typically fall. Needless to say, for an index as high-quality and diversified as the S&P 500, lower earnings expectations are rare, which is why bear markets are rarer than bull markets. Once a bear market starts, however, it's hard to tell when it's over until earnings expectations stop falling.

In fact, our top-down earnings model predicts that earnings expectations are unlikely to bottom out before September of this year, which also means that the trough for US stocks is still ahead.

Finally, it should be noted that given the current domestic inflation situation in the United States, the Fed's response mechanism has been very different. Every time there has been a sharp decline in earnings over the past 30 years, the Fed has started to ease policy before earnings per share (EPS) expectations bottomed out, and is still tightening policy today.

Investors dumped stocks in the month leading up to earnings season, followed by a rally as investors believed earnings had bottomed out.

We think that's going to happen again this quarter. Investors sold stocks in December in anticipation of headwinds affecting stock prices, and have since rallied as investors believe earnings expectations have bottomed out.

Overall, we expect earnings expectations to continue to decline in the coming months. This is a bone of contention in the market, and we believe that while the US economic data seems to have stabilized, and some data has even picked up again, the negative operating leverage cycle is still in place, which may lead to a dimming of the US economic outlook for the next six months.