Wells Fargo has reduced its year-end 2026 S&P 500 forecast to 7,700 from 7,950, despite increasing its longer-term earnings estimates, as the firm anticipates pressure on equity valuations and a potential market decline of 5% to 10% in the near term.
Analysts led by Ohsung Kwon raised their earnings-per-share projections to $425 for 2027 and $460 for 2028 but expect valuation multiples to decline as the market moves into a later stage of its cycle.
The revised outlook includes changes to the firm’s sector positioning. Wells Fargo lowered technology to equal-weight from overweight and raised health care to overweight from equal-weight.
The analysts also identified a strengthening South Korean won as a potential headwind for memory semiconductor stocks.
Investor positioning is a central component of the firm’s assessment.
Wells Fargo estimates that equity allocations have reached 72%, their highest level since 1969. With the 10-year US Treasury yield approaching 5%, the firm calculates that its framework supports an equity allocation closer to 60%.
The 12-percentage-point difference is the largest negative allocation gap recorded since 1969, according to the bank.
Wells Fargo said this measure has historically been associated with subsequent five-year equity excess returns. Its analysis indicates limited excess returns ahead under an assumed 7% compound annual growth rate in earnings per share.
The firm also highlighted the level of corporate earnings relative to historical trends.
It expects annualised 10-year EPS growth to reach 14% by 2027, a rate exceeded only during the post-war equity market expansion of the 1950s.
According to the analysts, earnings in 2027 are projected to be 42% above their cyclical level, the highest reading since that decade.
Wells Fargo consequently expects valuation multiples to contract in 2027, although it sees limited risk to earnings forecasts for that year.
The outlook for 2028 is more uncertain in the firm’s assessment, particularly if artificial intelligence capital expenditure slows.
Its 2028 EPS forecast of $460 compares with the consensus estimate of $487.
The analysts also identified a change in liquidity conditions. Wells Fargo’s Liquidity Indicator has declined to its lowest level so far this year, with the firm forecasting further deterioration through November.
It noted that defensive equities have historically outperformed during periods of declining liquidity and maintained its preference for quality stocks over higher-beta securities.
Meanwhile, its Complacency Indicator remains elevated, indicating that equity markets are pricing in relatively low volatility compared with other asset classes.
Monetary policy is another near-term consideration. Wells Fargo highlighted Wednesday’s Federal Reserve meeting after a higher-than-expected consumer inflation reading lifted the market-implied probability of an interest-rate move to 94%.
The analysts said attention would centre on whether Federal Reserve Chair Kevin Warsh presents the decision as the beginning of a broader tightening cycle or a single adjustment.
The firm also identified the September 24 meeting between President Trump and Chinese President Xi Jinping as a potential market event, while noting that markets currently anticipate a muted outcome.
Wells Fargo’s revised forecasts reflect an expectation that earnings growth may continue even as valuation multiples decline, creating the possibility of lower equity prices despite higher corporate profits.
