From a cyclical perspective, the current market is in the overlapping stage of three key cycles.

First, the stock market cycle is in the middle of an uptrend, and the overall trend is stable; second, the technology hype cycle is rapidly heating up, driven by fields such as artificial intelligence, chips, and new energy, attracting a lot of capital and attention; and more sensitively, the bubble cycle has begun to show signs, and the prices of some assets have significantly deviated from fundamentals under the impetus of speculative sentiment.

Investors should be aware that the market may be in the "meltdown" phase of a bubble cycle—a period in which risks are widely overlooked and prices rise sharply amidst extreme euphoria. During this period, short sellers often underestimate the bubble's sustainability, exiting prematurely and being penalized by the market. Meanwhile, long positions may become complacent and ignore potential risks, driven by emotion. If market sentiment reverses, asset prices could plummet without warning, as demonstrated by the bursting of the dot-com bubble in 2000.

Therefore, investors should avoid being overly obsessed with predicting short-term market trends and instead focus on risk management. Specifically, these strategies include maintaining a rational mindset in the face of market euphoria, developing flexible contingency plans, achieving diversified risk hedging through asset allocation, and, when necessary, utilizing hedging tools to enhance portfolio robustness and prevent a one-time decline from having a devastating impact on overall funds.

Market Trends

In the current market environment, investors are more inclined to sell if a company's earnings report fails to significantly exceed expectations. Last week, Google released a solid, "better than expected" earnings report, and its stock price briefly jumped higher at the opening bell, sparking a brief market euphoria. However, it subsequently faced sustained selling pressure throughout the day, ultimately recording only a small gain, demonstrating that the market is increasingly cautious in its response to positive news.

A more typical counterexample is Tesla. If its financial report fails to meet high market expectations, disappointment can quickly escalate, directly leading to a sharp drop in stock prices. These cases show that in the current context of valuation sensitivity and increased risk aversion, performance has become the core driver of stock price performance.

It should be pointed out that all of the above factors - whether it is financial reports, interest rate decisions, or employment data - are profoundly affected by current trade policy changes and related policy expectations. The uncertainty faced by investors this week is particularly complex.

In this context, extracting truly market-impacting signals from the dense information flow has become a top priority for investors. Staying alert and focusing on key data is the rational path to navigating short-term fluctuations.

The role of the US dollar

While I’m usually reluctant to make the US dollar the centerpiece of discussions, this week’s moves in the greenback have become impossible to ignore, driven by international earnings reports, the Federal Reserve meeting, and inflation data.

In theory, a weaker dollar is a boon for U.S. manufacturers and exporters. A weaker dollar makes U.S. products more price-competitive in overseas markets and improves the dollar-translated performance of overseas revenue. Considering that S&P 500 companies derive approximately 30% of their revenue from overseas markets, a weaker dollar could indeed be a driver of revenue growth.

Recently, PepsiCo, Coca-Cola, and Netflix all noted in their financial reports that the weakening dollar had a positive impact on their performance, reinforcing the market's expectation that a weaker dollar would boost profits.

However, a depreciating dollar is not without cost. A study by economist Torsten Slok suggests that a 10% depreciation of the dollar this year would push up US inflation by about 0.5 percentage points over the next nine months. This poses new upside risks to already stubborn inflation and could push the Federal Reserve further away from its 2% policy target.

At the macroeconomic level, there is no free lunch. While a weaker dollar improves export competitiveness, it can also create new market pressures by pushing up import prices, squeezing corporate profit margins, and even prompting the Federal Reserve to reassess its monetary policy path.

In short, the US dollar is both a booster and a trigger point. The key lies in how to balance its tailwind and headwind effects.

Inflation: Predictable trouble, unpredictable direction

Market sentiment regarding inflation trends is divided. Some believe it is continuing to decline, while others point to a creeping rise, particularly in the commodity sector. For example, in categories heavily reliant on imports, such as footwear, apparel, and tools, costs are rising, yet many businesses have yet to pass these costs on to consumers.

While this benefits consumers in the short term, it puts pressure on corporate profit margins. Retailers bear the brunt of this impact: maintaining prices will erode profits; raising prices could lead to declining sales, ultimately impacting profitability. In other words, profitability faces challenges no matter which path is chosen.

Walmart made it clear in last quarter's earnings call: Price increases are coming.

At the same time, Federal Reserve Chairman Powell has repeatedly emphasized that tariff policies may have an upward impact on inflation.

The current inflation structure exhibits a so-called horse race effect: commodity prices are rising, service prices are cooling, and the cost pass-through effect of tariffs is subject to lags and uncertainty. It is precisely these intertwined variables that make inflation trends, while predictable, difficult to accurately predict.

Corporate Profits: A Stress Test at a Critical Moment

Despite many uncertainties in the macroeconomic outlook, corporate profits have shown strong resilience so far.

Earnings for the S&P 500 remain positive year-over-year. However, some cautionary signs can be detected in the trend chart. For example, in the first quarter of 2022, despite earnings generally exceeding expectations, the stock market began to fall sharply from its 2021 high. At that time, market expectations of rapidly rising interest rates and potential declines in earnings dominated asset price movements.

Subsequently, in the second quarter of 2022, although companies continued to deliver better-than-expected results and the market rebounded, both earnings growth and expectations declined quarter-over-quarter. The market once again accurately predicted the subsequent decline in earnings.

Today, the market is once again at a similar crossroads. Although the current economic and policy environment is different from that of 2022, it would be reckless to simply rule out the risk of a repeat.

Therefore, profit margins have become a key indicator of corporate health, often considered the "canary in the coal mine." They reflect a company's ability to adapt to current macroeconomic pressures: are they absorbing costs through compressed profit margins, or are they successfully passing inflationary pressures on to consumers through price increases? Furthermore, against the backdrop of renewed tariff pressures and slowing employment growth, whether companies can maintain revenue stability will directly impact future profit expectations.

In short, we are in an era of increasingly severe profit challenges, with investors beginning to reassess the delicate relationship between tariffs, the labor market, and profits. Whether the resilience of corporate earnings can continue in this environment remains to be seen.

Interest rates and the Fed: Markets' 'suspension of disbelief'

Although investors have repeatedly bet on the "next rate cut time" over the past year, the fact is that there has been no substantial change in the Fed's policy tone.

Federal Reserve Chairman Powell has repeatedly made clear his current "wait-and-see" stance: the Fed will not easily start cutting interest rates in the absence of more obvious signs of economic slowdown or before obtaining more sufficient data on the impact of tariff policies on inflation.

Therefore, the market's focus on the Fed this week may not be on whether the policy rate itself changes, but rather on Powell's wording and economic assessment at the press conference. Rather than anticipating the specific timing of a rate cut, it's more important to focus on whether the Fed's new interpretation of the economic situation signals a potential shift.

More importantly, even if interest rates remain unchanged and the market remains uncertain about the timing of a rate cut, it won't necessarily have a substantial impact on the stock market. After all, over the past year, the expectation of no interest rate cuts has been repeatedly priced in. Bullish investors may be more patient with this "pause" than many expect.

In other words, the market's skepticism about "no interest rate cuts" may have become the default expectation at the moment. And precisely because this expectation is so deeply rooted, it may continue to provide a certain stability for the market.

Labor market: apparently strong, but weakening in reality

Last month's employment data appeared strong due to a surge in public sector hiring, particularly in education. However, excluding this, private sector job growth has been gradually slowing. The consensus estimate for Friday's report is for only around 100,000 new jobs.

Economist Thorsten Slok points out that current employment data may be misinterpreted. While job growth appears to remain robust on the surface, underlying changes warrant caution. Tighter immigration policies, particularly the deportation of undocumented immigrants, are projected to reduce the labor force by nearly 1 million people annually. This means the "break-even job growth" required to maintain a balanced job market has fallen to approximately 70,000 jobs per month.

In other words, even if employment growth slows, the unemployment rate may remain stable as long as it is slightly above this new threshold. However, this does not mean that the economy itself is strong, but may reflect the "superficial prosperity" brought about by the contraction of the labor supply.

More worryingly, the stability of this employment data may be based on policy factors—policies that are facing widespread legal scrutiny. This undoubtedly weakens the credibility of these "hard data" and makes us more cautious about the true state of the economy.

In short, while the labor market appears stable, it actually harbors hidden concerns. The quality and structure of growth are far more worthy of attention than the numbers themselves.

Tariffs: Invisible pressure will eventually become apparent

Tariffs are clearly a major uncertainty facing the current market. They possess nearly everything Wall Street hates : a lack of historical comparables, opaque enforcement mechanisms, frequent policy changes, delayed impacts, and outcomes often dependent on economic cycles and even the impromptu decisions of foreign leaders.

For example, there's a significant gap between interest rate announcements and actual implementation, and the true economic impact of interest rate adjustments often lags. This lag also applies to tariffs. While it's generally believed that the United States generates approximately $400 billion in revenue annually through tariffs, there's still no consensus on who bears the cost.

Ultimately, the costs will be borne by either consumers, businesses, or both. So far, businesses have absorbed most of the burden themselves, but this is unsustainable.

For retailers, import-reliant manufacturers, and multinational corporations, the cost pressures brought on by tariffs are becoming increasingly difficult to avoid. As more companies release their earnings reports this week, the market will focus not only on revenue and profits themselves, but also on how companies assess their pricing power, cost changes, and expectations for future profits.

What's truly alarming is that the burden of tariffs may be hiding behind seemingly stable prices and "good" profit data. It may be quietly eroding corporate profitability, and the market has not yet fully reflected this risk.

Therefore, this round of earnings season may reveal a key question: how much room or willingness do companies have to continue to "swallow" these costs?