Evercore's Emanuel explains why the AI trade won't crash

Investing.com -- The surge in artificial intelligence stocks has raised fears of bubbles, leverage-driven expansion and systemic risk. But Evercore ISI says those concerns remain overstated, and the foundations of the rally are stronger than skeptics suggest.

In a note to clients, analyst Julian Emanuel acknowledged market jitters tied to “worries of a Bubble inflating” and fears of “systemic risks from an AI circular economy and leverage fueled capex.”

Yet he argued that the conditions that typically precede a systemic unwind are not present.

“Systemic risks are still largely absent as equity crossholdings remain muted on aggregate, hyperscaler balance sheets healthy, leverage low, cash-flow sizeable and broad Credit contained,” the analyst wrote.

Cross-shareholdings, a hallmark of past market excesses, remain far from the danger zone, according to the firm.

Evercore ISI noted that “businesses owning 10% of total equities, similar to the Y2K’s top, would highlight a major ‘red flag’,” but said that level is not in sight.

On the balance-sheet side, the firm said hyperscalers “on aggregate… hold more cash than debt,” and that EBIT covers interest expenses by 44 times, compared with a “yellow flag” threshold of 10 times.

Credit markets also show no sign of stress, with IG and HY CDX indices “well below the 57/350 systemic warning levels,” according to the note.

Against that backdrop, Evercore ISI reiterated its call for the S&P 500 to reach 7,750 by the end of 2026, driven by “more AI, more stimulus, more earnings growth, more volatility.”

The firm remains overweight AI-centric sectors, including information technology, consumer discretionary, and communication services.

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