Technology has driven this year’s stock market rally to all-time highs. Now, Wells Fargo thinks investors may want to take the chips off the table. Strategist Douglas Bies downgraded the sector to neutral, citing very high valuations. Technology as a whole trades at a price-to-earnings ratio of more than 46 times, according to FactSet. This is a significant premium compared to the S&P 500 index’s 29.4 times. “Valuations have soared, and we are wary that overly bullish sentiment and heightened expectations for the group could leave the sector vulnerable to near-term disappointment,” Bies said in a letter to clients. “While some AI leaders reported huge AI-related capital spending in the third quarter, investor concerns about future payoffs and debt financing have spooked the market.” Indeed, stocks related to the development of artificial intelligence, such as Nvidia and Palantir Technologies, were sold off last week on concerns that they were overvalued. Nvidia fell 7% last week, and Palantir fell more than 11%. These losses sent the Nasdaq Composite Index down 3% for the week, its biggest weekly decline since April. PLTR NVDA 1M Mountain PLTR and NVDA 1-Month Chart “While the pullback may ultimately prove to be short-lived, we believe the sector remains vulnerable to negative surprises, which could potentially include modest failures in corporate earnings reporting,” Bies said. “We hope to lock in recent gains by reducing our IT exposure in line with the sector’s market weight.” Some large investors have already shed money. SoftBank announced overnight that it had sold all of its shares in NVIDIA for more than $5 billion. Nvidia shares fell more than 1% following the sale. But while the short-term outlook for the technology industry may not be very positive, the long-term outlook is positive. “We believe that the high-quality attributes of the sector are beneficial to investors, while the AI tailwinds are likely to drive above-market sales and profit growth,” Bies acknowledged. “Meanwhile, AI-related capital spending (capex) continues to accelerate rapidly, with major tech companies’ third-quarter reports exceeding rising expectations.”
