Evercore warns of 7-15% market pullback amid high valuations

Evercore ISI warns of a potential 7% to 15% market pullback in September/October, citing historically expensive valuations at 25x TTM P/E and increasing volatility, despite recent robust tech sector performance. Key catalysts include upcoming tariff announcements, soft jobs data, and elevated tech earnings expectations. While advising strategic investment in AI-focused themes within Communication Services, Consumer Discretionary, and Information Technology, Evercore also suggests tactical hedging through QQQ puts or call options on core AI holdings like NVDA and AMZN.

Analysis

Evercore ISI has issued a cautious near-term outlook, forecasting a potential market pullback of 7% to 15% in the September-October period, driven by historically expensive valuations. The market, as represented by the tech-heavy QQQ, is trading at a 25x trailing P/E ratio, a level that, while below the Y2K peak, exposes equities to correction risk following a robust 24% one-year return. The anticipated volatility is underpinned by several catalysts, including upcoming August 1 tariff announcements, the potential for soft jobs data while the Federal Reserve maintains current rates, and elevated expectations for technology sector earnings. A key concern highlighted is the divergence between the VIX index retesting low levels and high-yield credit default swaps remaining elevated, suggesting underlying market stress may not be fully priced into equities. Despite these tactical risks, Evercore maintains a long-term bullish stance, advising investors to remain strategically invested in core thematic portfolios centered on AI, specifically within the Communication Services, Consumer Discretionary, and Information Technology sectors.

Key Decisions for Investors

• Investors should consider implementing tactical hedges for the September-October timeframe, such as purchasing QQQ October 535 puts, to protect against the forecasted 7% to 15% market correction.
• For core holdings in high-conviction AI stocks like NVDA and AMZN, it may be prudent to substitute a portion of stock ownership with call options to maintain upside exposure while reducing capital at risk amid expected volatility.
• Maintain strategic overweight positions in AI-centric themes within Communication Services, Consumer Discretionary, and Information Technology, as the long-term bull market is viewed as intact.
• Closely monitor the divergence between the low VIX and elevated high-yield credit default swaps, as this could signal rising systemic risk not yet reflected in equity market sentiment.