Wells Fargo’s brokerage, investing and financial advisory arm is issuing a warning on the artificial intelligence (AI) and information technology (IT) sector following a significant rally over the past couple of weeks.

In a new investment strategy note, Wells Fargo Advisors says that while the prospects of the AI and IT sector remain “favorable”, the sector has gone up by around 37% since May 29th relative to 17% for the S&P 500 index, making it relatively unattractive for investors. According to Wells Fargo Advisors, there are other sectors that offer better opportunities.

“We suggest the consideration of rebalancing into ancillary sectors with more attractive valuations, such as Financials, Industrials, and Utilities.”

Wells Fargo Advisors says that one of the reasons why the AI and IT sector is currently relatively unattractive includes the massive initial public offerings (IPOs) slated for this year.

“History indicates that large IPO issuance occurs during periods of strong equity market sentiment, but the added equity supply can cause some indigestion. Household equity exposure already sits close to an all-time high, which suggests they may sell existing holdings to fund these new positions. Combined with the ongoing geopolitical tensions and the upcoming midterm elections, it could be one more reason for markets to display greater choppiness in the second half.”

According to Wells Fargo Advisors, the upcoming large IPOs, including SpaceX, OpenAI and Anthropic’s, might impact the rest of the stock market negatively.

“Mega-cap IPOs may force index providers to adjust methodologies, requiring index funds and exchange-traded funds (ETFs) to add new constituents. This can trigger buying pressure and temporarily drive up IPO valuations. It could also drain liquidity from other areas of the market, and increase concentration within major indexes.”

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Billionaire investor and Baron Capital CEO Ron Baron says he has given his firm the green light to accumulate 10 figures worth of SpaceX (SPCX) shares.

In a call with other Baron Capital executives, Baron says that since SpaceX is looking to raise $70 billion from the public markets following its debut on June 12th, he wants his investment firm to buy $1 billion worth of SPCX shares to avoid dilution.

“So we own about 1.25% of SpaceX. And if you’re going to raise $70 billion, and I don’t want to be diluted, then we need to have a billion dollars.”

According to Baron, he expects massive demand for SpaceX from multiple sources, starting with big money managers who do not own any or own very little of Elon Musk’s tech firm.

“And there are so many people who are huge money managers, people with $2 trillion, $3 trillion, $1 trillion. They don’t own a share. And the people who have $7 or $8 trillion, they own way less than they can. So you have huge demand coming from people who don’t own enough and have to own more.”

With SpaceX’s expected inclusion in the Nasdaq 100 following the adoption of the “fast-track” rule, the billionaire sees additional demand from passive investors.

“And then you also have these indexes where passive investors have to invest in those indexes, whether they like it or not. If they’re going to duplicate an index, and you have a new company coming into the index, they’ve got to invest in it. So you have demand coming from investors who don’t own any and are large-cap growth, they have to own it.

And then, in addition to that, you have people who are going to be trying to duplicate an index, and they have to own it too. And then you have people like us who say, ‘Boy, I have never in my life seen a business like this,’ and I haven’t. Then, they have to own it too.”

SpaceX is targeting an initial public offering price of $135 at a valuation of $1.77 trillion.

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