Wells Fargo Delivers Stark Warning as S&P 500 Could Drop 10%

This article first appeared on GuruFocus.

Wells Fargo lowered its year-end forecast for the S&P 500 (SP500) to 7,700 from 7,950, warning that stocks could face a five percent to 10% pullback before the year-end as earnings momentum matures.

The bank has grown more cautious on equities despite raising its earnings estimates to $425 for 2027 and $460 for 2028. Analyst Ohsung Kwon expects weaker valuation multiples to offset part of the projected profit growth.

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Investor positioning is another concern. Kwon estimates equities make up 72% of portfolios, the highest share since 1969. With the 10-year Treasury yield approaching 5%, Wells Fargo sees about 60% as a more appropriate equity allocation, leaving a 12-percentage-point gap.

The bank also shifted its sector preferences. It moved Technology to Equal Weight from Overweight and raised Health Care to Overweight from Equal Weight.

Within Technology, Kwon favors Software over Semiconductors. He also cited political resistance to data-center projects and currency pressure involving the Korean won as risks for chip companies. Wells Fargo expects semiconductor stocks could revisit their July lows.