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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