‘Peak’ uncertainty: Evercore ISI’s Julian Emanuel expects relief ahead

Key Concepts

• US Trade Policy Uncertainty
• Recession vs. Stagflation
• Jobs Number Importance (NFP)
• Federal Reserve (Fed) Policy & Jay Powell's Legacy
• Sector Rotation (Defensive vs. Growth)
• Soft Landing

Market Uncertainty and Trade Policy

Evercore ISI believes market uncertainty is peaking around the upcoming tariff deadline. Julian Emanuel notes that the US trade policy uncertainty chart is at unimaginable highs, even compared to the 2018-2019 trade war. Despite this, he maintains a bullish outlook on the market.

• Negative Sentiment: Emanuel observed extremely negative sentiment among clients and colleagues, comparable to the Silicon Valley Bank collapse.
• Clarity Not Required: He argues that material clarity isn't necessary; a reduction in the possibility of extreme scenarios (i.e., some indication of negotiation) is sufficient.

Economic Outlook: Recession vs. Stagflation

Evercore ISI's view is that the US will avoid a recession, projecting 1.7% growth for the year. The market can tolerate inflation in the high 2% to 3% range.

• Stagflation Risk: Inflation exceeding 3% raises the possibility of stagflation, but Emanuel believes the market is already pricing this in.
• Jobs Number Significance: The upcoming jobs number is crucial, potentially completing the stagflation equation.
  • Whisper vs. Official: The "whisper number" (unofficial expectation) is 100,000 jobs, while the official estimate is 140,000. A five-digit number (below 100,000) would be problematic.
• Administration's Messaging: The administration's messaging between now and the jobs report is critical. A message emphasizing pain and economic reconstruction would be poorly received by the market.

Federal Reserve Policy and Jay Powell's Legacy

Emanuel anticipates that Jay Powell is likely to be replaced next year. He believes Powell's legacy is tied to maintaining a soft landing and passing it on to his successor.

• No Rate Hikes Expected: Evercore ISI doesn't foresee the Fed hiking rates. If the Fed doesn't cut rates, it will be because the economy is deemed "okay enough" to do so.
• Dual Mandate: The discussion touches on the Fed's dual mandate (price stability and full employment) and how the Fed might react if unemployment rises while inflation persists.

Sector Rotation and Investment Strategy

Emanuel recommends accumulating stocks, but the conversation shifts to sector allocation.

• Defensive Sectors: Consumer staples and healthcare have outperformed, suggesting they've been a "hiding place" for defense.
• Uncertainty Priced In: Sectors like Walmart are pricing in uncertainty through multiple expansion.
• Reduced Uncertainty: With a little less uncertainty, Emanuel believes investors will return to the prior bull market sectors.
• Recent Sector Movements: Sectors moved in the direction of how the entire quarter was going.

Conclusion

The main takeaways are that while market uncertainty is high, Evercore ISI remains bullish, anticipating a soft landing and no further rate hikes. The upcoming jobs number and the administration's messaging are critical factors. Sector rotation is occurring, with defensive sectors outperforming, but a reduction in uncertainty could lead to a return to growth-oriented sectors.