Wells Fargo issues buy signal for S&P 500 after sentiment shift

Investing.com -- Wells Fargo's sentiment indicator has triggered a buy signal for the S&P 500, marking a shift from the sell signal issued in August. The indicator points to extreme bearishness in the market.

Historical data shows that following a buy signal, the S&P 500 rose 89% of the time by an average of 6.5% over the next three months. Wells Fargo noted that caution remains warranted given the current environment of decelerating profits and negative liquidity.

The firm identified several factors contributing to bearish sentiment, including concerns around AI financing, midterms, and Iran. Wells Fargo expects the market to remain choppy through year-end and anticipates semiconductors will trade in a range with lower highs.

For AI infrastructure, the bull case centers on 2027, when earnings are expected to be robust and supply-demand conditions should remain tight. Wells Fargo expressed concern about a potential slowdown in 2028 as additional supply enters the market.

The firm's analysis indicates that semiconductor stocks currently imply a through-the-cycle net margin of 37%, compared to the current 46% and the pre-AI peak of 32%. Wells Fargo continues to favor hyperscalers and infrastructure software companies.

Neoclouds accounted for 19% of total AI capital expenditure over the last twelve months and are projected to represent 15% of capex in 2027. The credit market is pricing in a 19% annual probability of default for CRWV, or a 65% chance over five years.

Wells Fargo noted that option-implied moves remain muted until the Federal Open Market Committee meeting and three hyperscaler earnings reports scheduled for late October. Jensen Huang is scheduled to speak on October 21.

Early earnings reactions have been subdued, with reporting companies moving an average of just 3.4% the day after earnings, falling 60 basis points. The median ratio of actual versus implied moves is tracking at 0.6x, the lowest since the first quarter of 2025.

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