Evercore strategists have identified a series of financial market indicators that could signal a correction in artificial intelligence-related stocks following last week’s technology sector selloff.
In a research note published on Sunday, a team led by Julian Emanuel said the recent declines marked the beginning of a price discovery phase for AI investments, with investors reassessing valuations, borrowing costs and the financial requirements of large-scale infrastructure development.
The firm identified four indicators that could signal a transition from the current bull market into a correction, or potentially a bear market if economic conditions deteriorate into recession.
Despite the identified risks, Evercore reiterated its year-end 2026 target of 7,750 for the S&P 500.
Credit Spreads and Earnings Revisions Among Key Indicators
Evercore highlighted four market developments that it believes warrant close attention as investors evaluate the sustainability of the AI-related equity rally.
The first is an increase in investment-grade credit default swap (CDS) spreads above their March peak of 68.33.
The second is a rise in high-yield CDS spreads beyond their previous high of 411.04.
CDS spreads reflect the cost of obtaining protection against a borrower’s default. An increase generally indicates that market participants are demanding greater compensation for credit risk.
The third indicator is a reversal in the upward trend of analysts’ earnings-per-share estimates, which could suggest that expectations for corporate profitability are weakening.
The fourth is a rise in the yield on 10-year US Treasury securities above 5.62%.
According to Evercore, these indicators could help determine whether recent market weakness remains concentrated in technology stocks or develops into a broader reassessment of financial asset valuations.
US Treasury Yield of 5.62% Identified as Fiscal Warning Level
Evercore’s Washington policy team said a 10-year Treasury yield above 5.62% could increase concerns about US fiscal conditions and government borrowing costs.
The strategists noted that the recent yield peak of 5.36% provided a reference point for assessing further increases.
They described 5.62% as “a reasonable level at which alarm bells would be expected to ring.”
The team referred to such a development as a potential “fiscal alarm bell.”
Higher government bond yields can influence borrowing costs across the economy, including corporate debt financing and household lending.
They can also affect equity valuations by increasing the discount rates applied to expected future earnings.
This relationship is particularly relevant for growth-oriented technology companies, where a substantial proportion of market valuations may depend on profits expected several years into the future.
Evercore Questions Assumptions Behind AI Debt Expansion
The strategists also examined the financing requirements associated with the expansion of AI infrastructure.
Evercore referred to an estimated $1.3 trillion in investment by 2027, including spending on data centres, computing capacity and related infrastructure.
The firm questioned the assumption that major technology companies, often described as hyperscalers, could continue issuing debt regardless of market conditions, even if their free cash flow became negative.
Evercore characterised that assumption as “pure fantasy.”
The strategists argued that borrowing costs, investor demand and access to capital markets remain important constraints on corporate investment plans.
Their analysis suggests that the increasing use of debt to finance AI infrastructure could make the sector more sensitive to changes in credit conditions.
Previous Market Cycles Provide Historical Comparisons
Evercore compared current investor expectations with several previous periods of financial market instability.
These included the collapse of the dot-com bubble in 2000, the 2018 equity market decline associated with trade tensions and Federal Reserve rate increases, and the bursting of Japan’s asset price bubble in 1989.
The firm also referenced the prolonged period of economic stagnation that followed Japan’s market downturn.
“Last week reaffirmed the ‘this time is no different’ notion amid a perfect storm for the AI bull market, highlighting dividing lines that, if crossed, could tip the bull market into correction, or even bear market,” Emanuel’s team wrote.
The comparisons were used to illustrate the potential consequences of changes in market expectations and financing conditions.
They do not establish that the current AI investment cycle will follow the same pattern as those earlier episodes.
Evercore Maintains AI Equity Exposure With Risk Hedges
Although Evercore identified several potential warning signals, the firm maintained its recommendation to retain exposure to selected AI-related stocks while the specified market thresholds remain unbreached.
The strategists referred to their preferred group of companies as the “AI class of 2026.”
They also recommended maintaining hedges against potential volatility surrounding the November 3 US midterm elections.
The suggested strategies included exposure to negative-beta stocks, S&P 500 straddles and December Nasdaq-100 put spread collars.
Negative-beta securities may provide diversification when broader equity markets decline, while options-based strategies can be structured to manage exposure to market movements.
Evercore’s recommendations reflect its assessment of current market risks and potential investment positioning rather than a forecast that a correction will necessarily occur.
Technical Levels Could Influence Investment Positioning
Evercore also identified technical reference points that could prompt changes to its recommended equity exposure.
The strategists suggested that investors could increase long positions and remove hedges if the Nasdaq-100 tested its 200-day moving average, described in the source report as being around 674.
They identified a corresponding level of 725 for the S&P 500.
The reported figures appear inconsistent with the headline levels of the two indices and may refer to a different technical measure. The original information does not provide sufficient detail to resolve that discrepancy.
The strategists nevertheless presented these levels as potential conditions for adjusting market positioning.
S&P 500 Year-End Target Remains at 7,750
Evercore maintained its S&P 500 target of 7,750 for the end of 2026 despite the recent decline in technology shares.
The firm’s analysis distinguishes between short-term price volatility and developments that could indicate a more sustained deterioration in market conditions.
Its framework places particular emphasis on credit market spreads, corporate earnings revisions and Treasury yields as measures of financial pressure.
The report also highlights the importance of debt financing as technology companies expand their AI infrastructure investment programmes.
For now, Evercore’s outlook remains conditional on whether the identified market indicators cross their specified thresholds and whether broader economic conditions continue to support corporate earnings.
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