Tech Stocks Surge 28% This Year – Should You Still Buy? Wells Fargo Downgrades, Shifts Focus to This Sector

Wells Fargo (WFC-US) has become one of the first Wall Street banks since this past spring to cut its target price for the S&P 500 index, now forecasting only about 1% upside from current levels through the end of 2026. This may also mark the first time since the initial outbreak of the U.S.-Iran conflict that a Wall Street firm has downgraded—rather than upgraded—the S&P 500 year-end target.

Wells Fargo's strategist team, led by Ohsung Kwon, lowered their S&P 500 year-end target on Tuesday (the 15th) from 7,950 to 7,700 points. The S&P 500 closed slightly below 7,620 on Monday, having already risen 11% year-to-date, meaning that according to the new target, there is only about 1% room for further gains for the remainder of the year.

Profits Forecast Higher, But Valuations Under Pressure

Notably, Wells Fargo remains more optimistic about corporate earnings, projecting that S&P 500 component companies will achieve $425 in earnings per share (EPS) next year, rising further to $460 by 2028. Their 2027 earnings estimate exceeds FactSet’s bottom-up consensus of $417.

However, Wells Fargo believes the recent rapid pace of corporate profit growth is unlikely to continue, and in the coming months, investors may begin factoring in slower earnings growth into valuations, thereby lowering the multiples they are willing to pay for stocks.

In a report provided to MarketWatch, the Wells Fargo team noted that markets may soon start pricing in a deceleration in corporate earnings growth beyond 2027. Over the past year, S&P 500 company earnings growth has been robust, with the most recent quarter showing a 50% year-over-year increase.

As a result, equity valuation multiples may continue to contract. The price-to-earnings ratio (P/E), which measures how much investors are willing to pay for each dollar of corporate earnings, is one of the most commonly used valuation metrics. The S&P 500’s forward P/E ratio has already begun declining this year, as stock prices have failed to keep pace with analysts’ continuously rising earnings expectations.

Slowing AI Capital Spending a Concern for 2028

While Wells Fargo is not concerned about 2027 EPS performance, it expresses skepticism about 2028 earnings prospects, primarily due to the risk of slowing artificial intelligence (AI) capital expenditures, which could erode corporate profits.

Wells Fargo pointed out that S&P 500 company earnings in 2027 will be 42% above their long-term trend level for this stage of the economic cycle—a gap that is the largest since the 1950s.

Downgrading Tech, Upgrading Healthcare

On sector allocation, Wells Fargo downgraded tech stocks from 'overweight' to 'neutral' and upgraded healthcare stocks from 'neutral' to 'overweight.' Within the tech sector, the bank shows a preference for software stocks over chip stocks.

Tech stocks have surged 28% year-to-date, compared to a 9% rise in the healthcare sector over the same period.

Wells Fargo stated: 'We believe midterm elections could pose a risk to tech stocks, especially as political pressure against data centers continues to rise.'

The bank added that if Democrats win control of both chambers of Congress in the November midterms, it could be positive for healthcare stocks and might create conditions for restoring enhanced subsidies under the Affordable Care Act (ACA).

Bank of America Raises Year-End Target

Meanwhile, Bank of America (BAC-US) earlier this week raised its S&P 500 year-end target, though still below Wells Fargo’s latest forecast. BofA increased its year-end target from 7,100 to 7,400 points and set a 12-month target of 7,800 points.

Compared to Wall Street’s individual stock price targets, 'top-down' index forecasts issued by macroeconomists and market strategists typically receive less market attention.