SKN | Wells Fargo Turns Neutral on U.S. AI Infrastructure as Semiconductor Valuations Reset

Key Takeaways:

• Wells Fargo upgraded its U.S. AI infrastructure outlook from Negative to Neutral, with analysts led by Ohsung Kwon arguing that the semiconductor selloff has created a more reasonable risk-reward environment.
• Semiconductor shares were approximately 38% below their June highs, while valuations had compressed to levels implying annual earnings growth of approximately 8%.
• The bank identifies 2028 as a critical period, when slower AI capital expenditure growth, rising depreciation and additional industry supply could pressure earnings.

Wells Fargo has adopted a less cautious position on U.S. artificial intelligence infrastructure, upgrading its sector outlook from Negative to Neutral following a substantial correction in semiconductor valuations. The change, outlined in research led by analyst Ohsung Kwon, reflects the bank’s assessment that the recent selloff has improved the balance between potential returns and downside risks. However, the revised position does not represent an expectation that the sector’s difficulties are over. Wells Fargo continues to identify a potentially challenging earnings environment as AI infrastructure investment matures.

Wells Fargo Reassesses AI Infrastructure After the Semiconductor Correction

The bank’s revised assessment follows a significant decline in semiconductor equities. According to the research cited by Insider Monkey, semiconductor shares were trading approximately 38% below their June highs, while the broader market correction had erased around $3 trillion from the S&P 500.

Wells Fargo’s analysts argued that current semiconductor valuations imply earnings growth of approximately 8% annually. This represents a meaningful adjustment in market expectations compared with the stronger growth assumptions that supported valuations earlier in the year.

The distinction is important. A declining share price does not necessarily indicate deteriorating business performance. When valuation multiples contract, investors pay less for each dollar of anticipated earnings, potentially creating a more attractive entry valuation if underlying profitability remains resilient. Wells Fargo’s move to Neutral reflects this improved risk-reward assessment rather than a declaration that the sector has reached its bottom.

Political and Regulatory Risks Could Reshape AI Infrastructure Spending

Wells Fargo also highlighted political developments following the U.S. midterm elections as a source of uncertainty for the sector. Democratic victories in several states have intensified attention on the environmental, electricity and community implications of large-scale data-centre construction.

Potential restrictions on permitting, power consumption and infrastructure development could delay projects or increase construction costs. Such developments would affect companies throughout the AI infrastructure ecosystem, including semiconductor suppliers, data-centre operators and businesses providing supporting equipment.

For Wells Fargo, the central issue is whether the current pace of infrastructure spending can be sustained as political scrutiny increases. Slower project approvals could influence future orders and revenue visibility even if demand for artificial intelligence remains structurally strong.

Why 2028 Represents a More Significant Earnings Challenge

The bank’s longer-term concern focuses on the transition from rapid infrastructure expansion to a more mature investment cycle. AI-related spending contributed approximately eight percentage points to S&P 500 earnings growth over the preceding year. Wells Fargo expects this contribution to continue supporting earnings in 2027, but sees the benefit diminishing substantially in 2028.

One important factor is depreciation. Technology companies investing heavily in data centres, servers and semiconductor equipment recognize the cost of these assets over several years. Consequently, depreciation expenses can continue increasing even after capital expenditure growth begins to slow.

This creates a potential earnings mismatch: the revenue and growth benefits from infrastructure investment may moderate while the associated depreciation charges continue affecting reported profitability. Wells Fargo also identifies additional supply arriving in 2028 as a possible source of pricing pressure that current market valuations may not fully reflect.

What Wells Fargo’s Neutral Position Means for Investors

The upgrade signals that Wells Fargo considers current valuations more balanced after the correction, but it does not eliminate the possibility of further volatility. The key variables are the sustainability of AI infrastructure budgets, the profitability of data-centre investment and the ability of technology companies to absorb rising depreciation costs.

For sophisticated investors, the bank’s analysis reinforces the importance of distinguishing near-term valuation opportunities from longer-term earnings durability. The critical test will be whether AI infrastructure spending generates sufficient recurring economic returns before investment growth begins to moderate. For a confidential discussion regarding technology-sector exposure and global portfolio positioning, contact our senior advisory team.