American banking giant Wells Fargo has issued a major caution to investors, downgrading the S&P 500 Information Technology sector from ‘Overweight’ to ‘Neutral.’
The institution attributed the downgrade to mounting concerns over stretched valuations and overheated sentiment in the AI-driven tech rally.
In this context, the bank’s investment arm, the Wells Fargo Investment Institute, noted that technology stocks are now trading at more than 46 times earnings, well above the S&P 500’s 29× average, leaving them vulnerable to even small earnings disappointments.
According to the bank’s global investment strategist Douglas Beath, the move marks a reversal from the institution’s April upgrade, which had followed strong post-tariff market performance. Since then, the IT sector has surged around 60%, outperforming the broader S&P 500 by more than 25 percentage points.
Beath acknowledged that artificial intelligence (AI) continues to drive robust revenue and profit growth, with leading firms reporting stronger-than-expected Q3 results and expanding capital spending on AI infrastructure.
Tech sector susceptible to crash
However, he warned that expectations have risen too far, too fast. Wells Fargo now believes the sector’s lofty valuations and intense investor enthusiasm make it susceptible to underperformance, especially if earnings fall even slightly short of forecasts.
The strategist also pointed to ongoing U.S.–China trade tensions and concerns about the returns on AI-related capital expenditures as additional sources of market risk. While Wells Fargo sees the recent tech pullback as potentially temporary, it advised investors to “lock in gains” by trimming their exposure to the sector.
“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 said.
Analysts turn bearish on tech stocks
Notably, the Wells Fargo call comes at an interesting time, as other market players have also issued warnings on the technology sector. As reported by Finbold, Michael Burry, the famed Big Short investor, cautioned that mega-cap tech firms may be inflating profits through aggressive accounting tied to their massive AI investments.
Burry said hyperscalers such as Meta, Google, Oracle, Microsoft, and Amazon risk overstating earnings by billions due to underreported depreciation on AI hardware like Nvidia chips, which have short life cycles.
He estimated the group could understate depreciation costs by roughly $176 billion between 2026 and 2028, artificially boosting reported profits.
To this end, Burry has taken large bearish positions against Nvidia and Palantir, buying put options worth roughly $187 million and $912 million, respectively.
Burry warned that the AI boom has fueled speculative excess, citing soaring tech capital spending and interlinked deals among giants.
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