Evercore's Emanuel 'Surprised' by Market's Strength

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00:00First day of the month, and we should just point out, we're coming out of a September that historically was supposed to be bad.

00:06We now know it was pretty decent. I am curious, though, when you look at the setup, where stocks are, where valuations are,

00:13and then, of course, all that's going on in the background with regards to the budget showdown in Washington

00:17and maybe the idea that we won't have the data to depend on anymore, what is your expectation for what we see this month?

00:24So, look, you've got to distinguish between this month and the very, very profound structural bull market that we have going on

00:36that's been going on almost two years to the day now that was interrupted briefly from February to April of this year

00:44and, again, has now resumed in earnest.

00:47And, frankly, we have been surprised within the realm of the fact that we're calling for $77.50 on the S&P 500 by the end of 2026.

00:57We have been surprised by the unrelenting strength that we've seen without a pullback.

01:05We continue to think that there is the potential for a pullback,

01:08and we're a little bit sort of nervous about the fact that the clients are not really asking us what they should be worrying about

01:17and only asking what they should buy.

01:20But, frankly, you can't deny the power of the tape on a day like today.

01:25You can. And, obviously, the old adage about not fighting the tape.

01:28But when you look at the skew in this market and how bullish it does seem to be,

01:31not only in terms of what we're seeing in the cash markets with regards to equities,

01:35but, of course, what you see in the options markets, the idea that nobody's really hedging right now,

01:40at least from what I can tell in the data.

01:42No. And it's been a strange environment.

01:46People tend to hedge at the individual stock level, but the overall broader macro hedges are not in place.

01:53And I think, you know, if you look at today, the knee-jerk reaction after the ADP report came out

02:00is that everyone said, OK, if this gets any worse, the Fed could cut 50 at the end of October.

02:07We don't think that's the case, by the way, but that tells you the very powerful psychology behind the bull move.

02:15Well, I want to talk about what is the macro hedge in this environment.

02:18Maybe you're seeing some of that behavior when it comes to the single stock level,

02:21but even though your clients aren't asking you, if they did,

02:25what would you tell them in terms of what would be the go-to hedge here?

02:29Well, from our point of view, it's very much dependent on what your portfolio looks like.

02:35We have been overweight the AI theme for two solid years now.

02:40We continue to like what you would call the enablers, the adopters, the adapters,

02:45the hyperscalers in those sectors where they're concentrated, communication services, consumer discretionary, infotech.

02:52And so by that measure, if you do think there's a pullback,

02:58you might want to think about hedging with triple Q options downside puts.

03:04It has been a loss leader for the past several months.

03:08But again, it's also part of the idea that if you think about it,

03:13the AI SOX index is up 100% since the April low.

03:19That annualizes at more than 200% last time I did my math.

03:25So, you know, to the extent that you have outperformance to spend, it's a potential thought.

03:31The other area that we find interesting is if you look at our quantitative work,

03:36what tends to work are low valuation stocks.

03:40We're in a very expensive tape, as we know.

03:42It doesn't stop going up, but it now over 26 times trailing earnings.

03:47Are there low valuation stocks out there?

03:48And I mean, ones that aren't dogs?

03:50There are a few.

03:52And if you look at the last two days,

03:54the health care sector is telling you that there are plenty in the health care space.

03:58Well, let's talk about health care a little bit more,

04:00because as you mentioned, I mean, the narrative has really shifted dramatically just in the past two days.

04:05But you look year to date.

04:07I mean, it's one of the laggards.

04:09That's been the case for several years here.

04:11I mean, you think about the news that we got this week in terms of being able to secure some deals,

04:16Pfizer with the Trump administration.

04:17Is that enough to actually bring sustained interest back into some of these health names?

04:22Well, it may not necessarily be sustained interest.

04:25And I would caution that, you know, as we get towards December,

04:30in a sector that has been the year to date laggard,

04:33there will probably be some tax loss harvesting to be done.

04:36But in general, we've seen these types of rallies be very strong, even for brief amounts of time.

04:43But when you think about it, what's fascinating is that there were a ton of political headwinds

04:48in the health care sector.

04:50Not saying they've all dissipated, because they clearly haven't.

04:53But all of a sudden, boom, with the shutdown happening,

04:59it has become the focus of the political battle.

05:03And both the Democrats and the Republicans are trying to win the mindshare battle in the health care sector.

05:10And generalist investors are very underweight,

05:13because frankly, it's not a typically offensive sector like the AI names are concentrated in.

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