Wells Fargo has lowered its year-end 2026 S&P 500 target to 7,700 from 7,950, citing concerns about equity valuations, investor positioning and liquidity conditions. The firm now forecasts potential near-term downside of 5% to 10%.
In a research note, analysts led by Ohsung Kwon raised their earnings-per-share forecasts to $425 for 2027 and $460 for 2028. However, they believe the market is “entering late innings of the cycle,” creating conditions in which valuation multiples could contract despite continued earnings growth.
As part of its revised outlook, Wells Fargo downgraded technology to equal-weight from overweight and upgraded health care to overweight from equal-weight. The firm also identified appreciation in the South Korean won as a potential obstacle for memory semiconductor stocks.
The analysts estimated that investors currently allocate 72% of their portfolios to equities, the highest proportion since 1969.
With the US 10-year Treasury yield approaching 5%, Wells Fargo calculated that an equity allocation of approximately 60% would be consistent with its valuation framework.
The resulting 12-percentage-point difference represents “the widest negative gap since 1969, wider than the Tech Bubble,” according to the firm.
Wells Fargo said this allocation gap has historically been correlated with subsequent five-year equity excess returns. Its analysis points to limited excess returns under an assumed earnings-per-share compound annual growth rate of 7%.
The analysts also described corporate America as “over-earning,” citing elevated earnings relative to historical trends.
They forecast that annualised 10-year EPS growth will reach 14% by 2027, a rate exceeded only during the post-World War II bull market of the 1950s.
The firm estimates that 2027 earnings will be 42% above their cyclical level, the highest such reading since the 1950s, and expects equity valuation multiples to contract during that year.
Although Wells Fargo sees limited risk to its 2027 earnings projections, it identified 2028 forecasts as more vulnerable to a slowdown in artificial intelligence capital expenditure.
Its 2028 EPS estimate of $460 is below the consensus forecast of $487.
Liquidity conditions represent another element of the firm’s outlook. Wells Fargo said its Liquidity Indicator has fallen to its lowest level of the year and is expected to decline further through November.
The analysts noted that defensive stocks have historically outperformed during periods of weakening liquidity and maintained their preference for quality stocks over higher-beta equities.
The firm’s Complacency Indicator also remains elevated, suggesting that equity markets are pricing in less volatility relative to other asset classes.
Looking ahead, Wells Fargo identified Wednesday’s Federal Reserve meeting as a potential market catalyst. Following a higher-than-expected consumer price index reading, the market-implied probability of an interest-rate move has risen to 94%.
The analysts said the key issue is whether Federal Reserve Chair Kevin Warsh signals the beginning of a series of rate increases or presents the decision as a “one and done” adjustment.
The firm also highlighted a September 24 summit between President Trump and Chinese President Xi Jinping as another potential market catalyst, although it said markets currently anticipate a limited outcome.
Wells Fargo’s revised outlook combines higher earnings forecasts with expectations for lower equity valuation multiples, reduced liquidity and potential near-term declines in the S&P 500.