The AI-driven tech rally is pushing other stocks higher, snowballing conditions into a momentum market. Evercore ISI Senior Managing Director Julian Emanuel joins Yahoo Finance Live to discuss how investors can benefit from market uncertainty in the AI bubble, while talking about key economic data the Fed will need to watch ahead of recession concerns.
Video Transcript
JULIE HYMAN: Investors are on edge. They're looking for the best way to position for a potential slowdown. Our next guest is staying optimistic. He says, it's time to embrace all of this uncertainty. Julian Emanuel, Evercore ISI senior managing director, is joining us.
Now, Julian, as I said earlier, embrace the uncertainty sounds very zen. And maybe that's how we should be feeling at this juncture of the year. You have been relatively positive this year at a time when many of your peers were not. And guess what, we had this first half rally. So how do we embrace the uncertainty?
JULIAN EMANUEL: Well, so, again, the backdrop is perfect because the world's most iconic company hit a $3 trillion market cap today. And that's pretty zen in and of itself, as the founder would have said. But for us, it's this environment where, essentially, the technology stocks, the AI-centric stocks really started a momentum market in March and into April. And the positivity of it all is this idea that you've got greater participation now.
Small caps, in particular, are having a very good month. In fact, banks having a pretty good month. And so for us, what that says is even though you are in an environment where momentum markets, they take on a life of their own, we raised our price target a month ago to 44 to 50 thinking that it might would take seven months to get there, not seven days. And now, we're revisiting that number as we get to 44 to 50 again.
The way to do this is if you are a bull or a bear, the option markets are so incredibly well priced that any concern you have or any speculation you might wish to engage in, options are the way to go in terms of your portfolio.
RACHELLE AKUFFO: Julian, hi. Rachelle here. As we see people pouring into any and every AI play that seems to pop up, what about some of the key inflection points that you think investors should be mindful of?
JULIAN EMANUEL: So, again, the momentum markets are notorious for taking on a life of their own. And the best example is 1999. And so if you think about it, the same company that I just mentioned hitting a $3 trillion market cap in the summer of 1999 was down 29% to a price split adjusted of $0.51 a share, versus the last price edging towards $200.
So, essentially, in this type of market, rather than thinking about when the AI bubble will burst, investors need to find strategies to allow them to hold these types of stocks for the long term. And that means either smaller than perhaps normal position sizes or actually, again, using the options market to hedge for what are likely only to be short-term hiccups on the way to higher prices.
BRAD SMITH: When do investors need to be able to determine that this company is not an AI beneficiary?
JULIAN EMANUEL: Well, that is one of these questions that, I think, certainly, we at Evercore ISI and almost all of our clients are thinking about right now. And the answer is that like everything else, listen to what management is saying. There's lots of companies in the industrial spaces, in diverse food service who are being very upfront about talking about how they intend to use AI to not necessarily cut costs, there's plenty of that, but also to increase efficiency and penetration of their clients and understanding of their clients.
Those are the ones you want to stick with. And the ones that skirt the issue are the ones that we would be a bit more skeptical about.
JULIE HYMAN: Julian, moving away from AI a bit, there's been this whole discussion about a broadening of the rally being necessary. And I want to ask you this question with a little bit of a different flavor based on something you mentioned in your most recent note. You said in one of your charts, financials are the oxygen of sustainable bull markets. Will they resuscitate? Will they?
JULIAN EMANUEL: Look, if June is any indication, it is entirely possible that they will, which is why July is very pivotal in our view. The results of the Fed CCAR came out earlier this week. And I think essentially, they were much better than feared. And frankly, a momentum market on literally every measure, whether it's inflation, whether it's bank stress tests, whether it's margins, which drove a lot of the first quarter coming in better than feared, is very sufficient.
And that's what we've seen in banks. And in our view, it's entirely possible that given as much of an underweight as banks have become with long only managers, we see a move toward the banks. And on balance, that is a positive.
RACHELLE AKUFFO: And, of course, you mentioned the Federal Reserve. Looking at this core PCE number that came in, obviously, still sticky. Not making the moves that the Fed would like at this point. And you have an empowered labor force. You need about two jobs to every one person. What position does this put the Fed in at this point?
JULIAN EMANUEL: So it does appear that the pause is going to be a very short lived event with the likelihood that they hike rates again in July. It's our view that that will actually be the last rate hike, not one more as is projected by recent Fed speak. Simply because we do think that the economy will start the process of slowing down. And that will change the trajectory.
But, again, from the Fed's point of view, they are likely to continue walking that very fine line between trying to set the economy towards a more sustainable pace versus what has happened throughout history, is that the Fed keeps going until something breaks, which is why, again, as much as we might like to enjoy summer vacation, both the data and incoming and the share price action are going to be very informative about the probability and the nearbyness or further outness of a recession.
BRAD SMITH: That's some serious non-swimming pool cold water on people's summer vacations, Julian. We don't love to hear that. But it's reality too. And so for many of those summer vacations, there are going to be conversations around the pool, around the barbecue, and the grill around what the reality of the Fed's actions might actually trigger an employment situation that becomes a little bit more, not dire, but perhaps worsens from the point that we've seen things stabilize right now.
JULIAN EMANUEL: So the first key is you need to go to beaches and mountains where there's good cell phone reception. That will work. But more importantly for us, the key metric here in an environment where, frankly, the pandemic and all the monetary creation we've had of the last three years has distorted a lot of the data and its meaning. The weekly jobless claims, that Thursday at 8:30 number, very, very key.
To us, you had this ratchet higher to where the four-week moving average is in the neighborhood of 250,000. Certainly off the bottom, not recession by any stretch of the imagination. The Fed would probably like to see that creep higher. However, it's one of those situations where you start moving sustainably above 300,000 a week. And then recession really draws near. We're not there yet. But that is, if anything, the key statistic to watch. So,
JULIE HYMAN: Julian, we have the overall framework here. I want to circle back around to finish this up with some strategy and get from you, your best idea going into the end of the year, whether it's a sector or strategy, and like what you want to avoid at all costs.
JULIAN EMANUEL: So, again, part of the difficulty of this environment is the need to think long term. And that works for people who do or don't own some of the biggest winners, and do or don't own some of the biggest laggards.
So frankly, when we think about it, there's almost a barbell effect. We want to stay convexed to those types of AI stocks. We call them momentum masters, who have exhibited good price momentum. There are some names that have less, actually, more defensive positioning as opposed to the types where we've already seen fear of missing out. Those names, again, across the smattering. Obviously, tech-centric are the types of names we want to stay convex to.
But also, when we look at a sector, again, with this idea that maybe, just maybe, the recession moves further out in time, a sector like energy, which has been more or less left for dead in the wake of last year's big run is already pricing in a recession. And we see stability in and around $70 a barrel. And we see free cash flow being extremely robust in these companies. We like those names.
RACHELLE AKUFFO: All right. We do appreciate you joining us. We'll be keeping an eye on those sectors you mentioned there. Julian Emanuel, Evercore ISI senior managing director, have a great weekend.
JULIAN EMANUEL: Thank you. You too.