Wells Fargo advised to lock in profits on IT stocks. Where to allocate capital?

Wells Fargo Investment Institute downgraded the IT sector in the S&P 500 index, which includes Nvidia, Microsoft, Broadcom and other major beneficiaries of the AI boom, from "positive" to "neutral". The main reason is the stock's overvaluation, MarketWatch writes. The bank's analysts advised several other sectors that investors should pay attention to.

Wells Fargo Investment Institute (WFII) downgraded its recommendation on the technology sector in the S&P 500 to "neutral," MarketWatch reported . The bank had maintained its advice to buy IT stocks since April 4 - after the announcement of higher trade duties caused the market to crash. Since then and through Oct. 24, the sector has gained 60%, outperforming the S&P 500 index by more than 25%, said WFII global investment strategist Douglas Beath. But now WFII believes the sector is overvalued and it's time to lock in profits, MarketWatch noted.

The analyst admits that the AI boom is likely to continue to support the growth of sales and profits of companies, and recognizes that the sector has a low debt burden and high free cash flow generation. In addition, AI capex is growing rapidly, and quarterly reports from major tech companies have exceeded inflated expectations. But Wells Fargo sees some cause for alarm: "However, valuations of companies have soared, and we are concerned about over-optimism and inflated expectations that leave the sector vulnerable to near-term disappointments," Beat notes.

Wells Fargo pointed to a few more threats to bigtech stocks. Technology remains a key topic in U.S.-China trade talks, and tensions between the countries persist. In addition, the growth of AI capex has begun to worry investors due to the potentially low returns on these investments and debt financing after the experience of the dot-com bubble era collapses of internet companies.

"The correction may be short-lived, but we believe the sector remains vulnerable to negative surprises, including even a slight miss on analysts' earnings expectations. We prefer the option of profit taking by reducing IT to the sector's market cap weighting," Beath summarized.

WFII advises reallocating capital to three sectors: industrial, utilities, and financial.

"The industrial and utilities sectors are enabling participation in the AI trend through a booming data center infrastructure, but with lower multiples than IT," the strategist notes. - We also see prospects for the financial sector on the back of a rising slope of the yield curve and a more favorable regulatory environment. In addition, finance participates in AI through M&A (mergers and acquisitions. - Oninvest) and debt financing, while trading at a significant discount to the S&P 500".

Microsoft's capital expenditures in the current fiscal year will exceed $94 billion, Meta 's will exceed $70 billion, and Alphabet 's will exceed $91 billion. However, investors have begun to express concern about the potential returns on these investments and the need for debt financing, which has increased market volatility, CNBC writes.

For example, last week, shares of AI-related companies, including Nvidia and Palantir, fell sharply: Nvidia's stock fell by 7% and Palantir's by more than 11%. The selloffs dragged down the Nasdaq Composite Technology Index, which fell 3% from Nov. 3 to Nov. 7, its worst weekly performance since April.

On Nov. 11, Japanese conglomerate SoftBank unexpectedly reported the sale of its entire stake in global AI processor market leader Nvidia for more than $5 billion. Nvidia shares were down 3.9 percent at one point in Tuesday trading.

This article was AI-translated and verified by a human editor