- Julian Emanuel of Evercore says the recent market rally should continue as stocks “grind higher.”
- He’s predicting that the strong job market will outlast elevated inflation.
- He says investors should look at heavily-shorted stocks and blend growth and value approaches.
After a rough couple of months, stocks may have finally found their footing.
Lately the market has confronted one of its periodic “walls of worry” thanks to the fastest inflation in 40 years, rising interest rates, supply chain trouble, and a war that’s made commodity prices spike. That combination of factors has brought about the worst decline in stocks since the COVID-19 crash two years ago.
Julian Emanuel, who leads Evercore’s equity, derivatives and quantitative strategy team, says it’s a good time to start adding stock exposure “carefully,” as the balance of risks and potential rewards looks good after all that selling.
Emanuel notes that surveys show that consumers are extremely worried about inflation, but they’re still spending money at a brisk pace and the job market remains very strong. Usually, Emanuel says, when consumers are downbeat and the economy looks good, economic conditions later change for the worse. But he doubts that will happen now.
“Commodity prices may have peaked, M2 growth (while still strong) has peaked, and the Fed’s balance sheet is set to shrink, all while jobs and savings remain plentiful,” he wrote in a recent report. As inflation eases, that will leave a strong foundation for continued economic growth and spending, all of which is good for stocks.
But Emanuel thinks stocks will “grind higher” rather than pulling off another rapid “V-shaped” recovery. So he says that investors should pick their investments by looking for value stocks that are putting up faster growth than other companies in their sectors, and growth stocks that score better than their peers on value metrics.
He calls the first group “growth-y value,” and the second “valuable growth.”
Emanuel ultimately thinks value stocks — defined here as consumer staples, energy, financials, healthcare, industrials, materials, real estate, and utilities — have more overall upside than growth sectors. However, he said that “New ways of thinking about the investing paradigm in an environment where stockpicking also continues to reign supreme are required.”
He notes one additional source of potential upside: well-placed bets on stocks that are heavily shorted could help investors outperform here. High short interest could lead to a short squeeze if these stocks perform well, which would push shares even higher.
The stocks highlighted below are among the most-shorted on Wall Street over the past year; many are “pandemic stocks” that investors have lost confidence in. To Emanuel, that’s a sign the stocks could reap major rewards if their performance holds up.
Read More: Investors can profit by buying these 26 stocks that live in the sweet spot between growth