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WELLS FARGO: ITS GROWTH OUTLOOK AND WHERE TO BET

The Wells Fargo Investment Institute raised its year-end 2026 and 2027 targets for the S&P 500 on Tuesday and its strategists held a virtual media conference to outline their thinking behind the updates. Here is a quick recap on the equities front.

Sameer Samana, head of global equities and real assets, highlighted "remarkable" earnings growth of 27-28% in the first quarter and said the last time earnings growth rates have been "even close to that" was in 2021, when the comparison was "really easy" versus 2020, when the world was shut down for COVID.

The key driver Samana points to is artificial intelligence spending. "Obviously, it's hard, unless you live under a rock, to avoid the headlines around artificial intelligence," Samana told reporters.

He sees the AI build-out happening faster than anticipated and says analysts are "catching up to where the puck is going."

On a cautionary note, the strategist sees longer-term risk in the fact that the build-out is so fast, but he said that "at least in the short run it's a benefit because it is driving a lot of those earnings growth rates."

So where should investors place their bets in this scenario? The strategist talked quality versus growth companies in terms of having cake and still eating it. But he argued that, "Right now, as an investor, the nice part is that you don't really have to choose one over the other."

"US large and mid caps have both grown earnings faster than their small cap brethren and tend to have better profitability and quality characteristics and better balance sheets," Samana said.

And while small cap stocks may have "done better on a performance basis" he said this was about momentum. "It has a lot to do with the fact that there's a handful of AI plays that are going to be graduating soon from the Russell 2000 into other Russell indices," he said.

"So small caps continue to be an area that we would continue to kind of be underweight. We just think that there's going to be a time when reality catches up with price performance," Samana added.

He prefers U.S. versus international investments. And within international, he prefers emerging markets with exposure to AI. This is instead of developed markets, which are heavily exposed to the Middle East energy crisis.

In sectors Samana said the company has been running an anything-but-defensives (ABD) strategy for a few years. Currently, this "includes overweighting financials, materials, utilities, and tech, along with industrials."

He doesn't like consumer discretionary, consumer staples or real estate.

"Thematically, we continue to like what I would call AI and AI-related sectors over pretty much everything else. They're growing at multiples of the real economy," he said.

But while WFII's targets looked bullish, Samana cautioned that he doesn't expect smooth sailing as "there's a lot of good news priced in the current levels, and positioning and sentiment have come a long way."

He argued for example that the market has already spent close to two-and-a-half months celebrating the U.S.-Iran peace deal, which is expected to be signed later in the week.

He also pointed out that "semis and other high momentum areas have run far and fast, along with smalls" and highlighted SpaceX's recent monster IPO.

"This all suggests that we are probably due for a breather prior to weaker seasonality and midterms in the fall," Samana said.

"Nothing sinister, I could easily see us either chop sideways, maybe even chop a little bit lower with a rally once the midterms are out of the way. I could even see us melting higher at a slow slightly slower glide path. Probably the scenario that at this point makes the least sense is the one where we get a bigger pullback."

(Sinéad Carew)

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