'It isn't different this time': Why one strategist sees excessive investor euphoria driving a 15% stock plunge

Business Insider

21-07-2025

Investors are optimistic as earnings season kicks off — a little too optimistic, according to Julian Emanuel, Evercore ISI's chief equity strategist.
The S&P 500 notched another fresh record high on Monday, and sentiment is skyrocketing as Wall Street banks raise their year-end S&P 500 targets.
However, stocks don't just go up: "Every structural bull market since the late 1990's has seen a late stage surge in capital markets activity and a period of intense investor FOMO," Emanuel wrote in a note over the weekend.
Evercore is remaining cautious, with Emanuel warning of a 7%-15% correction in the coming months. Evercore's year-end target is 5,600.
"FOMO has begun," Emanuel wrote. "Stocks have overdiscounted the potential for continued good news."
Emanuel says old-school fund managers who lived through the dot-com bubble are now asking him the four most dangerous words in investing: Is it different this time? The question is a clear signal that FOMO has kicked in as investors become overconfident and play into the cycle of fear and greed.
There's a lot of froth in the market: crypto is on a bull run as bitcoin hits all-time highs, zero days to expiration options are becoming popular among retail investors, and investors are counting on the AI story to continue carrying stocks higher. But good vibes aren't reason enough for the stock market to continue rallying.
In fact, it's quite the opposite: before the dot-com bubble burst, bulls comprised 75% OF AAII sentiment survey respondents, a level never seen again since.
Bullish investors point to strong economic data and an improving tariff backdrop as drivers for the stock market, but those tailwinds are largely already priced in, according to Emanuel. According to an Evercore survey, a majority of institutional investors anticipate tariff rates to come down from present levels of 22% to below 20% by September.
They also expect S&P 500 EPS to rise above current levels of $264. With expectations already so elevated, it'll be difficult for economic data to continue surprising to the upside. And while there's much market volatility surrounding the idea of Fed independence and Fed Chairman Jerome Powell 's future, markets are still pricing in that Powell will remain at his position by year-end.
"Even if there is good news on the tariff front, it is arguably already in stock prices," Emanuel wrote.
"Despite the potential for tariff induced guide-downs and the historical tendency of earnings estimates to fall at this point in the cycle, 67% of investors believe earnings estimates for 2025 will be at or above the current $264 on 9/1," Emanuel added.
With a trailing price-to-earnings ratio of 24.7x, the S&P 500 is trading at the top decile of valuations since 1960. Emanuel doesn't see a market crash in the cards, as valuations haven't reached the dot-com bubble's 28x price-to-earnings ratio.
A near-term pullback is Emmanuel's base case as investors overlook risks associated with ongoing tariff negotiations and the One Big Beautiful Bill posing risks to the bond market.
"The asking of 'The Question' shows scant regard for near-term risks. It isn't different this time," Emanuel wrote.