SKN | Wells Fargo Cuts S&P 500 Target as AI Capital Spending Faces a 2028 Test

Key Takeaways:

• Wells Fargo lowered its 2026 year-end S&P 500 target to 7,700 from 7,950, despite raising its longer-term earnings forecasts.
• Chief Equity Strategist Ohsung Kwon sees the central risk in hyperscaler AI capital expenditure, rather than simply headline market valuation.
• Wells Fargo estimates that another major AI spending year in 2028 could raise the demand required to justify existing infrastructure to approximately $2.2 trillion.
• The bank also estimates equity allocation at approximately 72%, the highest level since 1969, while expected earnings remain significantly above normalized levels.

Wells Fargo has materially recalibrated its U.S. equity outlook, cutting its year-end S&P 500 target to 7,700 from 7,950 while simultaneously raising its earnings expectations for 2027 and 2028. The distinction is important: the bank’s concern is increasingly centered on the durability of the artificial-intelligence capital-spending cycle and the valuation multiple investors are prepared to assign to those earnings.

Wells Fargo Shifts the Debate From Valuation to AI Economics

Chief Equity Strategist Ohsung Kwon argues that hyperscaler spending is becoming increasingly difficult to justify as each additional year of AI infrastructure investment raises the revenue required to support the accumulated asset base. Wells Fargo expects hyperscalers to spend approximately $1.5 trillion next year, with 2027 spending effectively locked in, according to Kwon’s framework.

The pressure becomes more significant in 2028. Wells Fargo’s analysis suggests that another trillion-dollar capital-expenditure year could increase the demand required to justify the infrastructure already being built to approximately $2.2 trillion. The issue is therefore not whether AI demand exists, but whether demand can expand quickly enough to generate sufficient returns on the enormous infrastructure investment.

Why Wells Fargo Is Watching Depreciation

The bank’s concern also rests on the timing of corporate accounting. AI infrastructure spending is initially capitalized, allowing companies to recognize the expenditure over time rather than immediately reducing earnings. Eventually, however, those assets generate depreciation expense.

Kwon estimates that 2027 earnings are approximately 42% above Wells Fargo’s normalized EPS level. That creates an important distinction for institutional capital: reported earnings can remain strong even while the underlying economics of the investment cycle become less favorable. Wells Fargo consequently expects valuation multiples to face pressure as the market moves into the later stages of the current earnings cycle.

Wells Fargo Also Flags Crowded Equity Positioning

The bank’s second concern is positioning. Wells Fargo estimates investors currently hold approximately 72% of portfolios in equities, the highest proportion since 1969. With the 10-year Treasury yield near 5% during the period of the bank’s analysis, Wells Fargo argues that the gap between actual equity allocation and a more balanced allocation is unusually wide.

That positioning matters because a crowded market can become more sensitive to changes in liquidity, interest rates and earnings expectations. Wells Fargo has therefore shifted its sector positioning as well, moving technology to equal weight from overweight while raising healthcare to overweight. The bank’s broader approach is to emphasize quality and reduce dependence on the highest-beta areas of the market.

The Strategic Signal From Wells Fargo

For sophisticated investors, the significance of Wells Fargo’s revision is the separation between earnings growth and earnings durability. The bank remains constructive enough to raise its 2027 S&P 500 EPS forecast to $425 and its 2028 forecast to $460, yet it has reduced the index target because it expects the market to confront a more demanding valuation environment.

The critical variable is now the conversion of AI infrastructure spending into sustainable economic returns. If hyperscaler investment continues to generate sufficient demand, the pressure may remain manageable. If spending slows before utilization and cash generation catch up, depreciation could become increasingly visible in margins. For globally diversified wealth, Wells Fargo’s framework makes AI capital intensity, liquidity and earnings normalization important variables to monitor alongside traditional valuation measures. For a confidential discussion regarding your cross-border banking structure, U.S. equity exposure or international wealth strategy, contact our senior advisory team.