A senior strategist at the independent research firm Evercore ISI believes that in the bull-case scenario, the S&P 500 could explode to much higher levels before 2026 expires.
The News
In a new CNBC interview, the firm’s managing director, Julian Emanuel, believes that the earnings growth story for the S&P 500, specifically in the AI trade, could trigger new rallies for the index in the coming months.
While investors are bullish as the S&P 500 trades close to all-time high levels, Emanuel warns that they appear to be ignoring one risk factor that could spark another market correction.
“Long-term, we are big proponents of the AI trade. And we think that even if you’ve got this 10% pullback, you could still get a rip to 9,000 if you got through the oil issue. But the oil issue is the sticking point. And the outcome is very, very unknown.
And from where we sit is that, in the same way, the potential for earnings to drive the market higher, like it did in April, is the potential for oil to drive the market lower now is underappreciated.”
According to Emanuel, Evercore ISI’s research indicates that the Strait of Hormuz needs to open up soon or else the market could “come off” by early July.
“So the work that we did starting in 2022 with the original Ukraine oil spike going back 40 years basically suggests that once you get to a level which we identified this time around between $93 and $98 a barrel and you stay there for three to four months and we’re giving the economy the benefit of the doubt like everyone around the table here is that gets you to the 4th of July.
Think about it. There’s a concept here where if you are not celebrating the nation’s 250th birthday, and you’re thinking about triple-digit oil, that’s when it starts to bite in terms of the market and the economy, in our view.”
What It Means for Investors
The S&P 500 is up over 17% since it bottomed on March 30th. Many analysts have called the recovery “remarkable” due to the pace at which the index erased losses.
Recently, “Big Short” investor Steve Eisman said that retail traders are placing bullish bets on the Mag 7 stocks plus AMD, Palantir and Broadcom at a blistering rate not seen since 2021. Emanuel himself also said that very few people are hedging or protecting their positions amid the rally.
In short, both analysts are saying that the catalysts for a significant market pullback are building, and investors could consider taking some chips off the table. With the Strait of Hormuz still closed and US Crude Oil (WTI) trading at $102, the clock may be ticking for the market.
But if geopolitical concerns in the Middle East are resolved, the path is open for the S&P 500 to sustain its bullish momentum, driven by an accelerating and broadening earnings story. Morgan Stanley CIO Mike Wilson recently reported that Q1 median S&P 500 earnings surprise was 6%, the strongest in four years, while earnings revision breadth has moved back up to 22% from just 5% at the beginning of the reporting season.
At the end of the day, it seems that tensions in the Middle East remain the only overhang that could derail the market from moving much higher.
Photo by Jakub Żerdzicki on Unsplash
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