The best circumstance for the stock market is rising earnings and low-interest rates. This is why investors and analysts pay so much attention to economic data as it's the best real-time indicator of the direction of earnings and its trajectory.

And, this exact circumstance is what was in place from March 2020 through most of 2021 as the economy kept improving, but the Federal Reserve maintained its zero-rate policy as it was looking to undo the damage from the coronavirus.

Now, we have the exact inverse of this situation as inflation has surged to its highest level since the early 80s. The Fed is so intent on bringing about price stability that it's willing to endure some damage to the stock market and economy in order to achieve its objective. Thus, instead of the 'Fed put', we have the 'Fed call'.

The optimal path for a Fed rate hike cycle would be that the headwind of higher rates is negated by the tailwind of strong economic growth, thus, economic data takes on an even more important during rate hike cycles especially when inflation is high as this indicates the Fed has less room to maneuver.

Therefore, recent economic data is especially concerning as we are starting to see a deterioration in leading indicators, increasing the chances of a sharp drop in the stock market. Some examples include the ISM New Orders measure which has dropped below 50, indicating that industrial demand has peaked. PMIs have also been declining across the board and are firmly in expansion territory but underlying trends indicate that we could be falling into contraction territory by year-end.

We've already seen higher rates wreck tech and growth stocks. Now, they are starting to pull down cyclical sectors like housing and consumer staples. The next area that we will likely see weakness is corporate earnings, and this explains why the stock market was immune to weakness until the start of the year. The final area that will show signs of weakness is employment.

Finally, all of these are normal developments that happen during any type of rate hike cycle. However, this time the inflation dynamic adds a more bearish element as it handcuffs the Fed. And, we have another massive headwind with the Chinese government's decision to shut down its economy in response to the omicron outbreak. This is an issue that has little clarity in terms of when it will get better. And, it has the effect of hurting growth in the near-term, while exacerbating inflation in the intermediate term.