According to Evercore ISI, as the Federal Reserve's rate hike cycle continues and long-term US Treasury yields remain elevated, the US Treasury yield curve is once again facing the risk of inversion. However, the firm believes there is not yet clear evidence sufficient to disrupt the AI-driven stock market rally, so it maintains long exposure to AI-related sectors such as technology, communication services, and consumer discretionary, while beginning to add some defensive positioning to its allocation.
Evercore points out that the spread between the US 2-year and 10-year Treasury yields has narrowed significantly, and the current trend bears some similarity to a period before the yield curve inverted in 2022. Historically, a yield curve inversion is typically seen as a leading signal of economic recession and stock market correction, but the time gap from the appearance of an inversion to the economy actually entering a recession varies greatly.
Rising Inversion Risk Does Not Mean Recession Is Imminent
Evercore's data shows that historically, after a yield curve inversion, the average lead time before the economy enters a recession is about 15 months, but this varies significantly across different cycles. After the 2019 inversion, the economy entered a recession in about 5 months, while the lead time in 1978 was as long as 34 months.
Moreover, a yield curve inversion does not always accompany an economic recession. Evercore notes that yield curve inversions occurred in both 1998 and 2022, but no typical economic contraction immediately followed. Therefore, a yield curve inversion is better suited as a signal of rising macroeconomic risk rather than an indicator that can accurately predict the timing of a recession.
Historically, Inversions Often Bring Volatility but Do Not Necessarily End Bull Markets
From the perspective of stock market performance, Evercore believes that a yield curve inversion typically brings increased short-term volatility and range-bound trading, but does not necessarily mean the end of a long-term bull market. 1998 is a typical example. At that time, the yield curve briefly inverted, and US stocks subsequently experienced a drawdown of about 22%, but this did not end the longer-term structural bull market.
This is also an important reason why Evercore currently maintains long exposure to AI-related stocks. The firm believes that although rising oil prices and US Treasury yields are increasing macroeconomic pressure, there are not yet sufficient signs that these factors have caused significant damage to corporate activity and the broader economy. Currently, corporate survey indicators remain in expansion territory, initial jobless claims remain low, and credit spreads remain contained.
Evercore believes these data temporarily do not support the judgment that the economy is deteriorating rapidly.
Oil Prices and 10-Year US Treasury Yields Remain Key Pressure Points
However, macroeconomic risks are rising. Evercore specifically points out that oil prices near $95 per barrel and the US 10-year Treasury yield rising above 5% have become the two most noteworthy pressure points in the current market. Sustained high energy prices could erode corporate profits and household real income, while rising long-term interest rates would increase corporate financing costs and compress equity valuation room.
If these two pressures continue to expand, the probability of the yield curve flattening further or even re-inverting will also rise accordingly. Therefore, Evercore does not view the current environment as simply "continuing to chase the AI rally," but has begun to emphasize the importance of portfolio defense.
Continue Holding AI but Add Some Defensive Allocation
Evercore observes that during historical yield curve inversion cycles, the relative performance of different sectors follows certain patterns. Before an inversion appears, tech stocks and Nasdaq-related assets tend to perform well; after an inversion, as market volatility rises and investor risk appetite declines, sectors such as healthcare, communication services, and consumer staples tend to perform more steadily.
Based on this historical experience, Evercore currently does not recommend that investors abandon AI-related exposure, but leans toward making partial defensive adjustments. Specifically, the firm remains bullish on information technology, communication services, and consumer discretionary sectors, while recommending increasing portfolio option protection while market volatility remains low, and allocating some "negative beta" stocks to hedge against macroeconomic shocks.
Evercore's current core judgment is that the risk of a yield curve inversion is rising, and the macroeconomic environment is indeed more fragile than before, but this is not enough to overturn the AI-driven structural bull market logic. The more appropriate strategy at present is not to exit AI, but to continue holding the AI main line while enhancing the portfolio's defense against interest rate, oil price, and economic downturn risks.
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