Wells Fargo says positioning rotation over, time to pick stocks

Wells Fargo said the positioning-led rotation in markets is largely complete and investors should now focus on individual stock selection.

The firm’s sentiment indicator triggered a buy signal last week, improving to -0.9 from -1.0 the previous week. The bank noted that correlations versus semiconductors for hyperscalers and software have turned positive over the past month, unlike in July, suggesting the market has treated AI and technology stocks without distinction.

Wells Fargo sees opportunities in hyperscalers and infrastructure software but said the market will want to see capital discipline.

The firm’s contrarian sentiment indicator now shows a sell signal for biopharma and life sciences, last triggered in late September. Within software, the bank’s analyst prefers AI winners in infrastructure and cybersecurity over application software.

Wells Fargo remains positive on healthcare as one of the only sectors with accelerating earnings per share growth and continues to favor quality over beta.

Israel is holding elections with betting odds showing about a 27% chance of a Netanyahu win. Wells Fargo said if Netanyahu does not win, it expects a rally in low-quality, rate-sensitive cyclicals such as the Russell 2000 and consumer stocks.

For the U.S. midterms, a split Congress would be positive for AI stocks, the bank said. The firm also highlighted gubernatorial races in Texas, which accounts for 27% of planned gigawatt capacity, and Georgia at 7%.

Credit strategist Ravi Shukla estimates $400 billion of debt issuance from the seven largest hyperscalers in 2027. Wells Fargo estimates $80 billion of financing gaps for neoclouds and up to $1.6 trillion of corporate financing needs, or 7% of M2 money supply, over the next year.