Wells Fargo flags S&P 500 buy signal on extreme bearishness

Wells Fargo strategist Ohsung Kwon reported that the bank's sentiment indicator has triggered a Buy signal, a move he attributed to extreme investor bearishness. The indicator reached -1.0, marking the first Buy signal since June 2025, after sitting at -0.5 the previous week. This shift follows a Sell signal issued in August.

Kwon noted that historical data shows the S&P 500 rose in 89% of instances following previous Buy signals, with an average gain of 6.5% over the subsequent three months. However, he cautioned that returns have generally been weaker in environments characterized by decelerating profits and negative liquidity. Kwon wrote that caution is warranted in such conditions, though sentiment may have become overly bearish regarding AI financing, midterms, and Iran.

The strategist expects a choppy market into year-end, with semiconductors remaining range-bound and posting lower highs. Kwon stated that the bull case for AI infrastructure relies on 2027, when earnings should be robust and supply-demand conditions remain tight. He identified a likely slowdown in 2028 as more supply comes online as a primary concern. Wells Fargo calculates that semiconductors are currently implying a through-the-cycle net margin of 37%, compared with 46% currently and a pre-AI peak of 32%.

Kwon emphasized that the bull case depends on capital discipline rather than increased capital expenditure. He estimated that neoclouds account for 15% of 2027 capital expenditure, noting that every 10% reduction in this figure equals a 2% hit to semiconductor earnings per share. The strategist said he continues to prefer Hyperscalers and Infrastructure Software that were sold off with semiconductors, a preference distinct from his stance in July. Wells Fargo also flagged a contrarian Buy sentiment signal for capital goods.