Wells Fargo: Sentiment Indicator Flashes a "Buy" Signal; Hyperscalers May Take Over as Market Leaders

Wells Fargo's latest sentiment indicator shows that U.S. stocks have fallen to attractive levels after declines driven by AI concerns and elevated oil prices, and has flashed a "Buy" signal for the first time since June 2025. The analysis team led by Chief Equity Strategist Ohsung Kwon wrote in a report that historically, after past "Buy" signals appeared, the S&P 500 rose an average of 6.5% over the following three months and posted gains in 89% of cases. They added that semiconductor stocks may remain range-bound, but hyperscalers and infrastructure software stocks will lead the market higher. Kwon said sentiment around AI financing, the midterm elections, and Iran may already be overly pessimistic. However, caution is still warranted amid slowing earnings growth and a negative liquidity environment. Although the S&P 500 was only 1.6% below its all-time high as of Monday's close, areas related to the AI trade have been hit harder. The Philadelphia Semiconductor Index has fallen 14% since October 6, with concerns about chip demand resurfacing. This week and next, earnings from major AI companies will be the market's focus. Kwon downgraded the technology sector to Neutral from Overweight in September, partly due to growing opposition to data centers as the midterm elections approach. Wells Fargo analysts said the recent Buy signal, as a contrarian indicator, reflects "extreme pessimism." Over the past few quarters, AI capital expenditure beating expectations had driven chip stocks higher, but Kwon believes this may no longer be a bullish reason going forward: more spending means more debt issuance, crowding out financing for cloud computing providers focused on the AI market (neoclouds). He wrote: "We believe capital discipline will become the bullish case, and hyperscalers are emerging as the new leaders." He also said the bullish scenario for AI infrastructure lies in 2027: by then earnings will be strong, and supply and demand will remain very tight.