Evercore ISI's Julian Emanuel: Mood around tech is as cautious as I've seen since ChatGPT launched

Key Concepts

• Tech Sector Leadership: The belief that the technology sector will continue to drive the overall bull market despite recent concerns.
• AI Build-Out Financing: Concerns surrounding the debt financing required for the continued expansion of Artificial Intelligence infrastructure.
• ISM Manufacturing Data: The Institute for Supply Management (ISM) manufacturing data and its implications for economic activity, particularly trucking rates.
• Federal Reserve Policy: Speculation regarding potential Federal Reserve policy shifts, specifically concerning interest rates and balance sheet reduction, influenced by political considerations.
• Software Sector Valuation: Assessment of current valuations within the software subsector of the tech industry, suggesting potential undervaluation.
• Government Shutdown Impact: The effect of the partial government shutdown on economic data releases, specifically the January jobs report.
• Market Psychology: The role of investor sentiment and psychological factors in market reactions to news and events.
• Notebook Technology: A recent technological development (likely referring to AI-powered notebooks) and its potential impact on the software sector.

Market Resilience Amidst Economic & Political Uncertainty

The discussion centers around market performance in the face of several potentially negative catalysts: a partial government shutdown delaying the January jobs report, fluctuations in gold and silver prices, and concerns surrounding the financing of the AI build-out. Despite these headwinds, the market demonstrated resilience, trading “beautifully” according to Julian Emanuel of Evercore ISI. The Bureau of Labor Statistics postponed the release of the January jobs report due to the government shutdown, stating it would be rescheduled upon resumption of government funding. Congress failed to reach a spending agreement over homeland security funding, but a House floor vote is anticipated.

Tech Sector as a Bull Market Driver

Emanuel expresses a contrarian view, maintaining a bullish outlook on the tech sector despite growing caution. He notes that the mood around tech is the most cautious it has been since the introduction of ChatGPT, yet he believes tech will continue to lead the bull market higher. He states, “I love being a contrarian here.” This perspective is supported by the market’s positive reaction on the day of the discussion, despite numerous challenging news items. He emphasizes the weighting of tech stocks in the broader market, making their performance crucial.

Economic Indicators & Transportation Sector Strength

The conversation highlights the surprising strength in the transportation sector, specifically trucking rates, which were at two-year highs. An email from Emanuel’s transportation analyst indicated a significant surge in activity. This strength is occurring despite potential temporary economic headwinds from recent cold weather. Emanuel asserts that the underlying economy remains “really strong.” The ISM manufacturing data was also discussed, with the analyst noting a positive signal from the transportation sector.

Federal Reserve & Political Influence

Kevin Warsh’s potential nomination to the Federal Reserve was briefly discussed, with Emanuel suggesting that President Trump is unlikely to nominate a hawkish candidate given his focus on providing liquidity and lowering rates. He believes the argument for balance sheet reduction will likely be postponed, at least until after the midterm elections. This suggests a belief that political considerations will heavily influence Federal Reserve policy.

Software Sector Opportunities

Emanuel identifies the software subsector within tech as potentially undervalued. He notes cautious sentiment following a recent announcement (likely an earnings report) and a negative price reaction from a major tech giant. He believes valuations are “troughing” and that much of the noise surrounding a new development called “Notebook” could be positive. He states, “These valuations are really troughing in our view.”

Market Psychology & Short-Term Reactions

The discussion acknowledges the role of market psychology, particularly in the immediate reaction to news events. Emanuel points out that the market’s initial negative response to the news regarding Kevin Warsh was likely a short-term psychological reaction. He emphasizes that a single day’s performance doesn’t necessarily indicate a broader market downturn.

Logical Connections

The conversation flows from a general overview of market conditions (government shutdown, economic data) to a focused discussion on the tech sector’s potential. The strength of the transportation sector is presented as evidence of a robust underlying economy, supporting the bullish tech outlook. The discussion then pivots to the influence of political factors on Federal Reserve policy and concludes with a specific assessment of the software subsector.

Data & Statistics

• S&P 500: Was down 90 handles at one point during the day of the discussion.
• Trucking Rates: Were at two-year highs.
• ChatGPT: Referenced as a benchmark for the shift in market sentiment towards tech.

Conclusion

The core takeaway is a cautiously optimistic outlook on the market, driven primarily by the tech sector. Despite economic and political uncertainties, including a government shutdown and concerns about AI financing, the market has demonstrated resilience. Emanuel’s contrarian view suggests that the current caution surrounding tech presents a potential buying opportunity, particularly within the software subsector. The discussion highlights the importance of considering both economic fundamentals and psychological factors when assessing market trends, as well as the potential influence of political considerations on Federal Reserve policy.