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The financial services arm of Wells Fargo is issuing a warning on tech stocks just months after recommending investors have an overweight position in the sector.
In a new report, Wells Fargo Advisors says it is downgrading the S&P 500 index’s information technology (IT) sector from “favorable” to “neutral” since the valuation now “looks rich” and could undergo a correction.
The bank says investors should take profits from tech stocks as the sector’s “overly bullish sentiment” and “elevated expectations” make it “susceptible to disappointment” over the short term.
“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 recent gains by trimming IT exposure back to the sector’s market weight.”
Consequently, Wells Fargo Advisors says it is now in “favor” of investors putting their money in three sectors instead.
“We favor reallocating to our remaining favorable sectors, Utilities and Industrials, and our most favorable sector, Financials.
The Industrials and Utilities sectors can allow investors to participate in [artificial intelligence ] 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 support AI through merger & acquisition activity and debt financing — while trading at a significant discount to the S&P 500.”
Financials include JPMorgan Chase, Mastercard, Bank of America and Berkshire Hathaway. Boeing, 3M, GE Aerospace, Caterpillar, Uber and Delta Airlines are among the stocks classified as industrials. Utilities include American Electric Power, PG&E Corporation, American Water Works and Duke Energy.
