Yesterday, US equities plunged after stronger-than-expected PMI prints signaled further upside inflation pressure, suggesting the economy will close Q3 on a fairly upbeat note. European stocks, by contrast, face the rest of the year balancing on a single fragile pillar — upbeat profit forecasts — even as their risk list keeps growing. The 10-year Treasury yield has climbed back above 5%, a reminder of how quickly sentiment can flip.

In recent weeks, markets have been rattled by inflation concerns and the prospect of a more aggressive central bank response if oil prices resume their rise. Many asset managers now advise watching for pre-earnings sell-offs, arguing that's when the market becomes most honest — although I don't rule out a scenario in which actual corporate profits beat expectations and fuel another leg up for stocks.

Technical signals, however, speak to investor caution more loudly than the optimistic forecasts. Since the mid-August peak, the Stoxx 600 has been trending lower and has failed to break its descending channel even after two successive attempts. During the recent US rally, the S&P 500 and Nasdaq could not reach their year-to-date highs. Now corporate earnings on both sides of the Atlantic will face extra pressure from higher rates and the prospect of continued tight policy.

I don't rule out that if the US sell-off and rising yields persist, economists will start to cut growth and earnings forecasts. In that case, pre-earnings weakness would be less of an outlier and more of an expected scenario in the weeks ahead.

Technically, the S&P 500 chart indicates that the immediate task for buyers is to overcome the resistance level of $7,679 to show renewed upside and open a path to $7,698. Holding above $7,718 would further cement the bulls' case. On the downside, buyers must defend the $7,656 area. A break below that level would likely push the index back to $7,633 and open the way to $7,607.