Wells Fargo warns that tech stocks are overvalued and suggests taking profits and shifting to the three major zones.

The AI boom has driven technology stocks to rise strongly, but Wells Fargo Investment Institute, WFII( warns that excessive optimism and soaring valuations may make the market susceptible to emotional impacts. As a result, the bank has downgraded the technology zone rating from “overweight” to “neutral,” advising investors to take profits and shift some funds towards industries like industrials, utilities, and finance, which are relatively undervalued and can still benefit from the AI trend.

AI hype drives up tech stock valuations: Overheating sentiment becomes a hidden concern

Wells Fargo pointed out that since Trump announced the “Liberation Day” tariff policy on April 4, the technology zone has surged by as much as 60%, significantly outperforming the S&P 500 index by more than 25%. The investment wave driven by AI has indeed boosted sales and profit growth, but the soaring valuations have increased short-term risks for the zone.

Wells Fargo global investment strategist Douglas Beath stated that AI drives corporate revenue and cash flow, with the Q3 earnings reports of tech giants generally exceeding expectations:

However, the valuation has surged significantly, and we are concerned that the market's overly optimistic sentiment and high expectations for this zone make the industry vulnerable to setbacks in the short term.

In other words, short-term corrections may just be temporary, but the market is currently extremely sensitive to negative news.

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Trade and financing risks still exist, investment returns are under scrutiny.

On the other hand, the technology sector remains the focus of US-China trade negotiations, indicating that potential risks have not been completely eliminated. At the same time, investors are beginning to worry about the actual return on AI investments and financing pressures, leading to fluctuations in the market due to issues related to the scale of capital expenditure and payback periods.

WFII emphasizes that although the long-term trend of AI still has momentum and attractiveness, the short-term risks cannot be ignored.

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Three major alternative investment zones: indirectly benefiting from AI, with more reasonable valuations

In this regard, WFII suggests that investors take profits from technology stocks and shift towards the following three zones:

Industrials ): Benefiting from the construction of data centers and demand for AI infrastructure, with valuations lower than the technology sector.

Utilities (: With AI driving growth in energy and electricity demand, it offers defensive and stable returns.

Finance )Financials(: Expected to benefit from a steeper yield curve, regulatory easing, and AI financing activities, with relatively cheap valuations.

Currently, the market sentiment is overly exuberant, and even minor mistakes in financial reports could trigger a correction. We tend to reduce the exposure in the information technology zone to a certain weight in order to lock in profits.

The AI trend has not stopped, but rationality prevails over chasing highs.

Financial giants share similar views. Yesterday, SoftBank Group under Masayoshi Son )SoftBank( just revealed that it liquidated its Nvidia stocks in October, recording $5.8 billion, which helped the company double its profits in the second fiscal quarter.

SoftBank stated that this move is aimed at promoting “asset monetization” to flexibly utilize capital to support future growth and redirect its funds towards other AI fields such as OpenAI.

) SoftBank liquidates its NVIDIA shares for $5.8 billion, what AI strategies is Masayoshi Son turning to? (

Wells Fargo believes that the AI boom will not come to an end, but the market's excessive focus on a few tech giants will exacerbate valuation risks. If investors can timely lock in profits and diversify into other marginal zones, they will have a better chance of standing firm in the next cycle.

This article warns that Wells Fargo believes that technology stocks are overvalued, suggesting to lock in profits and shift towards the three major zones. It first appeared in Chain News ABMedia.