According to Evercore ISI, the market has entered a correction phase driven by weak August and September seasonality and heightened political volatility, reminiscent of the Clinton vs. Dole and Bus vs. Gore election years.
"[The] correction has begun in Time and Price," analysts noted, predicting the S&P 500 will test its 100-day moving average (5,272) by the Democratic National Convention on August 19-22 before resuming an upward trajectory to a year-end target of 6,000.
Despite the turbulent market conditions, Evercore ISI sees no signs of a 2000-style tech bubble. They emphasized that, unlike the Y2K period, there has been "no surge in sentiment, no surge in M&A, no deterioration in market breadth, and no material labor market deterioration."
However, they do caution that a market correction is still possible. Historically, a -13% pullback is average in a non-recession year, with August and September being the weakest months. Evercore ISI suggests that this correction phase will eventually resolve into further market upside, comparing the current environment to the 1996 election year.
Amid the volatility, Evercore ISI advises positioning with core investments in AI Revolutionaries and maintaining an overweight stance on sectors like Communication Services, Consumer Staples, Health Care, and Information Technology.
They believe it is prudent to avoid economically sensitive sectors such as Consumer Discretionary, Industrials, and Materials. Additionally, they see opportunities in Small Cap Standouts and Small Cap/Valuation Factor Standouts, advising to "buy weakness."
Technology shares are particularly pressured as President Biden places fresh restrictions on tech exports to China, adding another layer of volatility to the market. Despite the challenges, the firm notes that small caps have outperformed recently, benefiting from cooling inflation and rising expectations of Federal Reserve rate cuts.