Wells Fargo & Co.'s chief equity strategist, Ohsung Kwon, has lowered his year-end S&P 500 Index target to 7,700 from 7,950, implying only about a 1% gain from Monday's close. Kwon is one of the few Wall Street strategists to trim a forecast recently, attributing the change to an expected slowdown in a decade-long earnings growth cycle and mounting risks within the technology sector. He believes the market is entering the "late innings of the cycle," which argues for multiple compression and poses a 5%-10% downside risk before reaching the new target. A 5% decline would bring the index to 7,239, while a 10% slide would put it at 6,858.
Kwon highlighted concerns over investor equity allocation, which he estimates at 72%, the highest level since 1969. This is significantly higher than the fair equity allocation of approximately 60% (40% bonds) suggested by the current 10-year Treasury note yield, creating a 12-percentage-point gap that is wider than during the Tech Bubble. He also noted that Wells Fargo's liquidity indicators recently hit their lowest levels of the year, and the Complacency Indicator remains elevated, indicating that equity markets are pricing in less volatility than other asset classes.
In response to these concerns, Wells Fargo downgraded its investment opinion on technology to equal-weight from overweight and upgraded healthcare to overweight. Kwon sees the upcoming midterm elections as a potential risk for the tech sector, particularly with increasing political pushback against data centers. Conversely, a potential Democratic sweep in the midterms could be positive for healthcare, potentially restoring enhanced Affordable Care Act subsidies. While Wells Fargo raised its earnings-per-share (EPS) forecasts to $425 for 2027 and $460 for 2028, these are accompanied by expectations of lower equity valuation multiples, reduced liquidity, and potential near-term S&P 500 declines.
