The technological revolution driven by artificial intelligence is not just sustaining the market. It could push the S&P 500 index to unprecedented heights, reaching 7,750 by 2026. This positive forecast from Julien Emanuel, Senior Managing Director and Head of Equity Derivatives and Quantitative Strategy at Evercore ISI, hinges on the continued strength and growing influence of core AI trading, which he argues remains the driving force behind capital markets activity.
Mr. Emanuel spoke with CNBC's “Power Lunch” team and detailed Evercore ISI's bullish stock strategy. The conversation centered around the market's surprisingly strong start to the new year, and emphasized that the momentum generated by technology leaders in 2023 is far from over. Emanuel acknowledged that some market participants were cautious or irritated by December's volatility, but explained that the fundamental trends remain the same: the stocks and themes that have led the market for the past three years, particularly telecom services, consumer discretionary and infotech, are expected to continue to dominate.
The rationale for this continued leadership is simple. These sectors are direct beneficiaries and enablers of the ongoing AI infrastructure build-out. Historically, bull markets are characterized by continuity rather than sudden turns. “As a historical trend, capital markets have been guided by the names and themes that got us here in the first place, and we think that is AI trading,” Emanuel noted, confirming that initial skepticism about the concentration of market interests has largely evaporated as the fundamental profitability power of these giants has materialized.
Emanuel pointed out that although capital market activity has been active recently, there is still a lot of room for expansion compared to the overall market capitalization. This suggests that the current surge in valuations is not an unsustainable exuberance, but rather a necessary readjustment reflecting extraordinary technological change and massive corporate investment. The enthusiasm surrounding AI has translated directly into significant capital expenditure (CapEx) commitments from underlying cloud and infrastructure providers, hyperscalers, who are constantly acquiring more power capacity and computing resources to meet the surge in demand for generative AI models and services. This capital investment cycle directly impacts the revenue and growth prospects of semiconductor and hardware enabling companies.
Looking ahead to the upcoming earnings season, we expect these technology industry heavyweights to continue beating guidance. The high heart rates seen throughout previous cycles are expected to continue, driven by both operational efficiencies and the deployment of AI-driven products. “We think high single digits will be enough to push these names up once we get to the full year,” Emanuel said, emphasizing that even modest growth rates based on a huge revenue base provide convincing momentum. But it's not just the quarterly numbers that Evercore ISI is keen to watch, it's the forward-looking commentary. Specifically, they are monitoring “how hyperscalers and enablers talk about the future” and are seeking confirmation that multi-year plans for AI-related capital spending remain solid and unhindered. It appears that appetite for capital investment has not yet peaked.
Despite his firm belief in AI-driven rallies, Emanuel outlined key risks that could derail the trajectory towards the 7,750 goal. These risks are primarily macro in nature and focus on the potential failure of the Federal Reserve and monetary policy. The short-term volatility index (VIX) is trading at relatively low levels, suggesting investor comfort with geopolitical and economic risks.
Emanuel suggested the Fed may be “overstimulating.” This potential for over-easing, coupled with strong growth, poses the biggest threat to stock market momentum.
A major concern is the significant rise in long-term interest rates. If the 10-year Treasury yield rises toward 4.50% or 4.75% (although such a move has not yet occurred), it could act as a punitive discount factor and unfairly hurt the valuations of high-growth technology companies whose future cash flows are highly sensitive to interest rate changes. Although Evercore ISI currently puts the probability of a true “bubble” scenario (mathematically defined as the S&P 500 index trading at 30 times earnings of $300, or $9,000) at only 30%, its biggest caution remains tied to the bond market and the potential for policy mistakes that would sharply increase long-term borrowing costs. But for now, AI trading is believed to be powerful enough to overcome the current consensus hurdle and push the market to new records.
