Corporate earnings peaked at $1.845 trillion (£1.3 trillion) in the second quarter of 2015, and recessions typically start five to seven quarters after the peak. "We will not be dancing on the volcano like so many others," said Saint-Georges.

If we are lucky it will be a slow denouement with a choppy sideways market going nowhere for another year as the US labour market tightens, and workers at last start to claw back a greater share of the economic pie. 

The owners of capital have had it their way for much of the post-Lehman era, exorbitant beneficiaries of central bank largesse. Now they may have to give a little back to society. Yet this welcome “rotation” spells financial trouble.

Strategists Mislav Matejka and Emmanuel Cau, from JP Morgan, have told clients to prepare for the end of the seven-year bull run, advising them to trim equities gradually and build up a safety buffer in cash. “This is not the stage of the US cycle when one should be buying stocks with a six to 12-month horizon. We recommend using any strength as a selling opportunity,” they said.

Their recent 165-page report on the subject is a sobering read. The price-to-sales ratio (P/S) of US stocks is higher than any time in the sub-prime boom. Share buy-backs are at an historic high in relation to earnings (EBIT). Net debt-to-equity ratios have blown through their historical range.

This is happening despite two quarters of tighter lending by US banks. Spreads on high-yield debt have doubled since 2014, jumping by 300 basis points even after stripping out the energy bust. The list goes on; the message is clear. “One should be cutting equity weight before the weakness becomes obvious,” they said.

David Fuller's view

Here is a PDF of AE-P's article.

There are a number of good points in this article, inspired by the bearish 165-page report from JPMorgan mentioned above, which I assume Jamie Dimon would have encouraged given his recent comments.

In many respects Wall Street has already been in a cyclical bear market, given an early warning by the Transports Average which peaked in late November 2014.  It then fell 31.2% over the next 14 months before forming a climactic V-bottom reversal in January of this year, when other indices were experiencing meltdowns.  While still well below its highs, Transports nine-week rally suggests that we will now see a partial retracement and potentially lengthy right-hand extension phase during which this year’s lows hold. 

The Russell 2000, a good indicator of market breadth, fell 27.2% between June 2015 and February 2016.  Its V-bottom recovery rally has now slowed beneath the 200-day MA and large overhead top formation.  Some retracement is now likely and RTY will need to hold the February lows if a significant challenge of the top formation is to occur before yearend.

Interestingly, DJ Utilities fell 17.8% from its January 2015 high before this defensive sector formed another base which propelled it to a new all-time high.  This is impressive although some reaction and consolidation of these gains is now likely.  Utilities have been led higher by Nextera Energy Inc, which combines wind, solar, natural gas and nuclear power units.           

Among more frequently viewed US indices, the S&P 500 rallied impressively before losing momentum beneath last year’s highs.  It could easily slip back beneath 2000 and the range lows just above 1800 will remain vulnerable until the progression of lower rally highs is decisively broken.  Dow Jones Industrials have a similar pattern to the S&P.  Nasdaq Composite is slightly weaker following years of outperformance due to the previous strength of the Nasdaq Biotech Index and iconic Apple.   NBI is more interesting following the shakeout although recent support building just above 2500 and relative performance appear insufficient at this time to sustain more than a technical rally.  Apple is underperforming following its spectacular advance from 2009’s lows to 2015’s highs.  Consequently, the 2015/16 lows just above $90 are likely to be retested long before the highs above $130 are challenged.

In conclusion, most of Wall Street’s influential stock market indices are still more likely to range sideways to somewhat lower than resume their previous upward trends.  While the economic risk of a too strong Dollar Index has faded, the prospect of somewhat higher interest rates from the Fed will remain a headwind.  Investor sentiment is clearly negative but this cyclical bearish phase is unlikely to become considerably more severe unless the US economy slips into recession.  A halt in the slide of US corporate profits is required to reduce this risk.