Evercore ISI strategist Julian Emanuel is steering investors toward 10 negative beta stocks as a hedge against a potential selloff in AI-driven tech names.
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Evercore Names 10 Negative Beta Stocks to Hedge AI Selloff
Evercore ISI strategist Julian Emanuel recommends 10 negative beta stocks — including Costco Wholesale Corp., Coca-Cola Co. and CME Group Inc. — to hedge portfolios against a potential selloff in AI stocks, with the CBOE Volatility Index near 16.
"The assumption is that the shorts will have to cover if AI stocks fall, driving stock prices sharply higher," Emanuel wrote in a report laying out positioning advice for the weeks ahead.
The strategist sees three events that could roil markets in the next five days: Treasury Secretary Scott Bessent's Iran policy discussion Monday, Nvidia Corp.'s earnings Wednesday and Fed Chair Kevin Warsh's speech at Jackson Hole on Aug. 28. Emanuel suggests buying puts on ETFs tracking the Russell 2000 index of U.S. small-cap stocks, which have substantially outperformed the S&P 500 recently.
The recommendation reflects growing concern over AI sector concentration risk, with the S&P 600 small-cap index up 22.4 percent year to date, roughly 10 percentage points higher than the S&P 500. Emanuel also likes call options on the Nasdaq to prepare for when volatility concerns subside, comparing a potential rally to the tech runup after Y2K fears abated.
The negative beta stocks most likely to interest investors include Costco Wholesale Corp., Coca-Cola Co., CME Group Inc., Chubb Ltd., Mondelez International Inc., Keurig Dr Pepper, Halliburton Co., Dow Inc., Bunge Global SA and Quest Diagnostics. These names are inversely correlated to tech-dominated market indexes but carry positive earnings revisions and high short interest, meaning shorts would need to cover if AI stocks fall.
Emanuel's report provides a road map for investors. Follow the Russell 2000 this week for signs of a sustainably risk-off market environment. If things remain reasonably stable, watch for a sharp rally in AI stocks, and if they don't, follow the negative beta stocks for new investment opportunities.
The strategist finds stock options broadly cheap, with the VIX near the 16 level. U.S. small caps have substantially outperformed the S&P 500 recently, and a risk-off market move would likely cause a significant retracement. Emanuel compares the potential AI rally to the tech runup when Y2K fears abated on Jan. 1, 2000, after which the Nasdaq 100 climbed 19 percent to the end of March before the dot-com bubble burst.
Other strategists echo the cautious positioning. Citi chief U.S. equity strategist Scott Chronert continues to favor U.S. small caps, finding earnings and cash flow growth outlooks compelling with forward P/E ratios low relative to historic averages. Goldman Sachs economist Jan Hatzius is forecasting lower U.S. growth and a Federal Reserve on hold for the remainder of the year, which would exacerbate weakness in the U.S. dollar against the Canadian dollar and the euro.
Wells Fargo strategist Ohsung Kwon finds health care and industrials the most popular overweights among long-only hedge funds, while algorithmic CTAs were adding European equities and U.S. Treasuries while selling U.S. dollars to buy gold.
The growing focus on hedging strategies shows the concentration risk in AI-driven markets. With Nvidia — the world's largest company — reporting earnings Wednesday and the Fed chair speaking at Jackson Hole, the next five days could determine whether investors need to deploy these hedges or whether the AI rally resumes.
This article is for informational purposes only and does not constitute investment advice.
