Energy prices are the central variable that Evercore analysts identify as determining the durability of the recent U.S. equity rally. In a note circulated to clients, the firm cautioned that WTI crude must stay below its March spike high of $96.05 on the July futures contract "to avoid lasting damage to stocks and the economy."
The backdrop for their warning includes a sharp run-up in crude that helped pressure the market. WTI moved from $54.98 in December to a peak of $119.48 on March 9. Over the same period, the S&P 500 index has retreated by nearly 10% from its all-time high of 7,002.28 reached in late January. Evercore flagged stretched equity valuations, elevated household equity ownership, investor concern about AI disruption, and what it called one of the most dangerous geopolitical backdrops since World War II as additional headwinds.
Despite those challenges, Evercore's baseline expectation is that the bull market will resume. That constructive scenario rests on three explicit conditions: no recession, no further Fed rate hikes, and declining oil prices. On that last point, Emmanuel Cau and his team argued WTI should roll back toward their $88 Brent forecast and away from the level they describe as "economically and stock market toxic" - the roughly $4 per gallon gasoline threshold - ahead of the U.S. Memorial Day holiday on May 25.
"While an unwind of contrarian Bearish positioning in stocks, credit, bonds, and gold and Bullish in oil will eventually be a tailwind for the market, the oil price remains the lynchpin to the Bull case," the analysts wrote.
At the time of the note, Evercore observed the WTI May contract trading at about $110. The firm also highlighted signs of resilience in corporate profit expectations: bottom-up consensus earnings per share for the S&P 500 have been revised higher since the market peak, moving from $312 to $320 since January 28.
Evercore pointed to historical patterns to support their view that a market recovery is plausible. They noted that in years when earnings grew by 10% or more, the S&P 500 rose in 10 of 11 instances, with an average gain of 13%. On geopolitics, they reviewed 13 episodes since 1985 when the Geopolitical Risk Index entered the top first percentile; in those cases the S&P 500 produced an average 12-month forward return of 13.6%, and delivered positive returns in 10 out of 12 instances once the immediate volatility eased.
Positioning in markets is another element Evercore believes could help the recovery. They described levels of contrarian bearishness across stocks and credit, and noted that put options on the Nasdaq 100 were historically expensive relative to calls. The analysts said the eventual unwinding of these hedges could push equities back toward the higher end of the year's trading range.
As a marker of their view on where the market could head, Evercore has set a year-end price target for the S&P 500 at 7,750.
Summary of key points, risks, and market implications are provided below.