Evercore ISI told clients in a note that ongoing investment in artificial intelligence is changing market behavior, and that one of its analysts has flagged a new concern: declining free cash flow at the largest hyperscalers. Julian Emanuel described that deterioration as the firm's first systemic "yellow flag."
The firm does not see an immediate deceleration in AI activity. It expects capital expenditure at hyperscalers to total roughly $650 billion over the next 12 months, a level Evercore ISI sees as consistent with continued heavy investment in AI infrastructure.
Even with that cautionary signal, the firm emphasizes that company fundamentals, rather than sentiment, are the primary drivers of equity performance today. Evercore ISI contrasted the current environment with what it characterized as the exuberant, FOMO-driven market of the 1990s.
Credit-market behavior, the note said, reflects concern over AI-related disruption. High-yield spreads in the technology sector have widened amid those worries, yet investment-grade spreads remain compressed. That divergence has persisted even after a major tech issuer introduced a 100-year bond.
Emanuel referred to that century-duration issuance as a watershed event, drawing a parallel with a prior century bond by another issuer in the late 1990s. He pointed to how a major credit issuance can overlap with strong structural themes in the market.
On the equity outlook, Evercore ISI remains bullish on the larger structural trend. The firm projects the S&P 500 will reach 7,750 by the end of 2026, driven by earnings growth, and it regards recent pullbacks as tactical opportunities to add exposure to companies positioned to benefit from long-term AI adoption.
To that end, the firm recommends buying three types of companies it expects to benefit from AI over time: "Enablers," "Adopters," and "Adapters." It specifically identifies communication services, consumer discretionary, and information technology as sectors in which investors might find such opportunities.
Evercore ISI also noted that market breadth remains in good health, pointing out that the advance-decline line has reached new highs—an indication, in the firm's view, that participation underpins the current market advance despite episodic weakness.
Clear summary: Evercore ISI warns falling free cash flow at large hyperscalers is a first systemic yellow flag but says AI spending shows no sign of slowing, forecasts $650 billion of hyperscaler capex in the next 12 months, sees a structural bull market with S&P 500 target of 7,750 by end-2026, and recommends buying Enablers, Adopters, and Adapters across communication services, consumer discretionary, and information technology.