Oil price remains the key variable for whether the current bull market in U.S. equities survives, Evercore analysts say, warning that WTI crude must hold below its March spike high of $96.05 on the July futures contract “to avoid lasting damage to stocks and the economy.”

The index has fallen nearly 10% since reaching the 7,002.28 all-time high in late January, buffeted by a surge in crude oil from $54.98 in December to a peak of $119.48 on March 9, alongside stretched valuations, elevated household equity ownership, AI disruption concerns, and one of the most dangerous geopolitical backdrops since World War II.

Still, Evercore’s base case is that the bull market resumes, with the broker’s optimistic case resting on three expectations: no recession, no Fed rate hikes, and oil prices retreating.

On oil, the analysts led by Emmanuel Cau said WTI needs to fall back toward its $88 Brent forecast and away from the “economically and stock market toxic $4/gallon level for gasoline” before Memorial Day 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,” they wrote.

The WTI May contract is currently trading around $110.

A key reason for optimism is that earnings estimates have actually been revised higher since the market peaked. Bottom-up consensus EPS for the S&P 500 has moved from $312 to $320 since January 28, and Evercore highlighted that in years with 10% or more earnings growth, the S&P 500 has risen in 10 out of 11 instances, averaging a 13% gain.

History also offers some reassurance on the geopolitical front. Looking at 13 instances since 1985 when the Geopolitical Risk Index spiked into the top 1st percentile, the S&P 500 delivered an average 12-month forward return of 13.6%, with positive returns 10 out of 12 times once near-term volatility subsided.

On positioning, the analysts pointed to contrarian levels of bearishness in stocks and credit, with put options on the Nasdaq 100 historically expensive relative to calls. “The eventual unwind of these hedges is likely to push stocks back toward the upper end of the year’s range,” they said.

Evercore’s year-end price target for the S&P 500 is 7,750.
Source: Investing.com