Wells Fargo says lock in gains in tech and invest here instead

Wells Fargo Investment Institute says elevated expectations make the sector susceptible to disappointment Wells Fargo Investment Institute says it's stepping back on AI-themed tech stocks and opting for other "favorable" options right now. The AI-trade, led by Nvidia, was back in vogue to start the week after a recent beat down, but signs of stress from CoreWeave seem to be weighing on sentiment for Tuesday. Investors of late seem to be straddling fears of missing out on the AI trade and worries over a dot-com-esque bubble. Taking a side on that is our call of the day from Wells Fargo Investment Institute (WFII), which has downgraded the S&P 500 Information Technology sector XX:SP500.45 - home to Nvidia, Microsoft, Broadcom and other big names linked to the AI trade - from favorable to neutral. The big reason is valuations. The move reverses a shift to favorable on April 4 as Liberation Day tariff announcements ripped through markets. From that point up to Oct. 24, the sector rose 60%, outperforming the S&P 500 SPX by more than 25%, notes Douglas Beath, global investment strategist. Beath allows that the AI tailwind will drive sales and earnings growth and that the sector has relatively low debt and high free cash-flow generation. Capital expenditures linked to AI continue on a fast-acceleration path, with big tech companies' third-quarter reports beating elevated expectations, he noted. So what's the problem? "However, valuations have surged, and we are wary that overly bullish sentiment toward the group and elevated expectations make the sector susceptible to disappointment in the near term," he said, offering the following chart: Beath said tech has been a focal point of U.S. and China trade negotiations, and those tensions haven't gone away completely. Also, while some bellwethers have reported big jumps in AI-related capex spending, investor worries about return on investment and debt financing have rattled markets at times. "The pullback ultimately may prove to be short-lived, but we think the sector remains vulnerable to negative surprises, potentially including even modest misses in corporate earnings reports. We favor locking in gains by trimming IT exposure back to the sector's market weight," he says. So taking a bit off the table for tech, Beath said the firm recommends putting money into three favorable sectors. "The industrials and utilities sectors can allow investors to participate in AI through the booming ancillary data-center trend, but with lower valuations than IT. We believe financials can benefit from a steepening yield curve and a more favorable regulatory environment - and also supports AI through merger & acquisition activity and debt financing - while trading at a significant discount to the S&P 500," said Beath. Read: Buying the dip has been especially successful for traders this year. Can it last through the final weeks of 2025? The markets U.S. stock futures (ES00) (YM00) (NQ00) are pointing to a struggle for stocks on the heels of Monday's rally. The bond market is closed in observance of Veterans Day. Gold (GC00) is back above $4,100 per ounce and crude (CL00) is slipping. Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern. Take control of your news. Make MarketWatch your preferred source on Google. The buzz The Senate has passed a compromise package to end the government shutdown late Monday, and it now heads to the House of Representatives for a vote. Private sector employers shed an average of 11,250 jobs a week in the four weeks ending Oct. 25, suggesting a tough latter half of the month for the labor market, according to ADP. CoreWeave's (CRWV) solid revenue beat was overshadowed by the cloud-computing group's guidance cut over a data-center delay, and shares are dropping. Nvidia stock (NVDA) is falling after SoftBank (JP:9984) sold its entire stake for $5.8 billion, to make an even bigger AI bet. Beyond Meat shares (BYND) are sliding after the meat-substitute group and past meme favorite warned of sluggish sales. Paramount Skydance shares (PSKY) are gaining after the entertainment group's upbeat forecast. Wall Street's biggest bull reveals what investors got wrong this year - and what's ahead for stocks and crypto. 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Wells Fargo says lock in gains in tech and invest here instead

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