Wells Fargo has lowered its target for the S&P 500 and does not expect growth of more than 1%. What has changed?

Wells Fargo strategists have lowered their year-end target for the S&P 500 to 7,700 points, which implies a gain of just 1% from the September 14 closing price. This may be the first time since the start of the U.S.-Iran conflict that a Wall Street firm has lowered—rather than raised—its forecast for the index, MarketWatch notes. Wells Fargo cited a lack of new drivers for further growth, as well as mounting political and sector-specific risks, Reuters explains.

Wells Fargo strategists, led by Osung Kwon, expect the S&P 500 index to reach 7,700 points by the end of the year, rather than the 7,950 points they had previously forecast, according to MarketWatch. The bank’s new forecast calls for growth of about 1%, whereas the previous projection called for more than 4%. In a note to clients, Wells Fargo analysts warned that the market is entering the “late stage” of a ten-year growth cycle, which is typically characterized by lower valuation multiples.

The rapid pace of profit growth seen recently is unlikely to continue for long, according to the bank’s note. Last quarter, aggregate profits for S&P 500 companies rose 50% year-over-year. In 2027, according to Wells Fargo’s estimates, profits will be 42% above the cyclical trend—a level that historically would correspond to this stage of the economic cycle. This gap will be the widest since the 1950s, the strategists noted.

They fear that a potential slowdown in AI capital expenditures will impact companies’ financial results in 2028. Analysts warn that the market will soon begin to price in a slowdown in earnings growth after 2027. As a result, investors will be willing to pay less for stocks, and market multiples will continue to decline, according to Wells Fargo. The forward P/E ratio of the S&P 500 index—which shows the ratio of stock prices to next year’s earnings—is already declining: analysts’ forecasts for this metric are rising faster than the stock prices themselves, according to MarketWatch.

Wells Fargo downgraded its recommendation on the technology sector from “outperform” to “neutral.” And if they had to choose, the bank’s strategists would prefer software developers’ stocks over those of chipmakers.

At the same time, they upgraded the healthcare sector's rating to "outperform," which is equivalent to a recommendation to buy these securities.

"We view the midterm elections [for the U.S. Congress] as a potential risk to the technology sector, especially given that political opposition to the construction of data centers continues to grow," according to a Wells Fargo note cited by MarketWatch.

Over the past three months, the number of moratoriums on data center construction in the U.S. has increased by 175%, according to Bloomberg. Dozens of counties and municipalities have passed laws suspending or restricting projects due to strain on power grids, high water consumption, and land-use concerns. For example, in July, New York became the first state in the country to impose a statewide moratorium: the deployment of large new facilities with a capacity of 50 megawatts or more has been suspended for one year. “We expect this trend to continue, especially given that developers of cutting-edge AI models are expressing concerns about safety issues,” Bloomberg quotes Kwon as saying. According to him, these risks are amplified by the high probability of a Democratic victory in the midterm elections, as the party generally advocates for stricter regulation.

In addition, Wells Fargo believes that if the Democrats gain control of both chambers of Congress in the November midterm elections, this would be a positive development for the healthcare sector. Such an outcome could pave the way for the restoration of the expanded subsidies provided for under the Affordable Care Act.

Bank of America, on the other hand, raised its target for the S&P 500 on Monday. However, its new target is even lower than Wells Fargo’s—just 7,400 points. Moreover, it anticipates a 3% decline in the index. BofA strategists warned of the risk of a correction amid high inflation and possible Fed rate hikes.

Citigroup analysts have adopted a neutral stance on the risk of investing in U.S. stocks. The bank believes that calls by AI developers to slow down the technology’s development could put pressure on the stock market, and advises investors to hedge their risks, according to MarketWatch. According to Citi, investors can protect themselves using put options on the QQQ and VanEck Semiconductor exchange-traded funds.

At the same time, Tallbacken Capital Advisors raised its forecast for the S&P 500 from 7,400 to 8,500 points, citing exceptionally strong corporate earnings growth.

In August, JPMorgan raised its target from 7,800 to 8,000 points, citing a strong earnings season and the impact of investments in AI, while strategist Ed Yardeni raised his target from 8,250 to 8,400 points. This, however, was before the resumption of hostilities in the Persian Gulf and the new oil rally.

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