Tech has powered the stock market’s rally to all-time highs this year. Now, Wells Fargo thinks investors may want to take some chips off the table. Strategist Douglas Beath downgraded the sector to neutral, pointing to sky high valuations. Technology as a group trades at more than 46 times trailing earnings, according to FactSet. That’s a steep premium to the S & P 500 index’s 29.4 multiple. “Valuations have surged, and we are wary that overly bullish sentiment toward the group and elevated expectations make the sector susceptible to disappointment in the near term,” Beath wrote to clients. “Some AI bellwethers reported massive AI-related capex spending in the third quarter, but investor concerns about future payoffs and debt financing have rattled markets.” Indeed, stocks tied to the buildout of artificial intelligence, such as Nvidia and Palantir Technologies , sold off last week on worries that they may be overvalued. Nvidia dropped 7% last week while Palantir slid more than 11%. Those losses dragged the Nasdaq Composite lower by 3% for the week, its biggest weekly pullback since April. PLTR NVDA 1M mountain PLTR and NVDA 1-mo chart “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,” Beath said. “We favor locking in recent gains by trimming IT exposure back to the sector’s market weight.” Some of the biggest investors are already cashing out. SoftBank revealed overnight it sold its entire Nvidia stake for more than $5 billion . Nvidia shares fell more than 1% on the sale. But while the near-term outlook for tech may not be super favorable, the long term looks bright. “We believe that the sector’s quality characteristics will serve investors well while the AI tailwind likely has legs to drive above-market sales and earnings growth,” Beath admitted. “Meanwhile, capital expenditures (capex) related to AI continue to rapidly accelerate, with third-quarter reports from major tech companies topping elevated expectations.”
