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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The brokerage, investing and financial advisory arm of Wells Fargo is highlighting one market sector that could benefit immensely from growing investments in artificial intelligence (AI) and data centers.

Wells Fargo Advisors says that the current stock market performance is being driven by investments in artificial intelligence (AI) and data centers. According to Wells Fargo Advisors, utilities are one of the key beneficiaries of this burgeoning investment.

“As a key supplier in the data center landscape, the Utilities sector is riding this demand wave and has produced strong returns, a trend we expect to continue.”

Wells Fargo Advisors says that electric utilities are “likely to see the greatest data center benefit” relative to other subsectors.

“As owners of power generation and distribution assets, utilities — electric utilities in particular — stand to benefit from this long-term infrastructure buildout. In fact, many have already raised long-term annual earnings growth outlooks into the high-single- to low-double-digit range. When paired with 2% to 3% dividend yields, this supports attractive total return prospects, in our view.”

Besides electric utilities, Wells Fargo Advisors says other utility subsectors are also going to benefit, but on a reduced scale.

“Electric utilities, however, do not have a monopoly on data center power demand. Natural gas distributors (also utilities), producers (energy companies), and pipeline operators are also benefiting by supplying fuel or building on-site power generation at data center campuses.”

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A Goldman Sachs tech specialist thinks one sector of the market looks particularly exciting amid historic stock gains.

Peter Callahan, a telecom sector specialist, says in a new interview that US internet stocks have lagged software this year and haven’t received enough attention.

“There are ongoing debates about sources of funds, about ongoing investment cycles, about the health of the consumer, and of course, where AI in the consumer world goes over the next couple of years. But as of late, you’re starting to see a little bit more innovation from the product side on US internet companies tied to AI.

The temperature on the consumer seems to be coming down as oil prices have reset off the highs. And so given that backdrop and cleaner positioning, I’ll be watching the US internet sector from here.”

Callahan also outlines what investors should track when looking at semiconductor stocks, which are having their best year in decades.

“I think for semiconductors, listen, it’s been a great start to the year. I think any time a group’s up 80% like it is in five months, there’s of course– you have sort of these momentum dynamics. You have too far, too fast.

You have all that type of stuff that kind of matters over the short term. But I think over the medium term, what really matters is earnings revisions, right? And as long as you are getting earnings revisions for this group, which helps keep multiples in track, I think investors will be comfortable adding to this group on pullbacks or momentum unwinds or different pockets of positioning pressures that can show up, of course, when you have moves like this.

So I think at the end of the day, just keep tracking the earnings growth and I’ll do my best to keep this group informed.”

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Fundstrat technical strategist Mark Newton says the US stock market is poised to broaden beyond semiconductors and memory stocks, warning that tech has gotten “over its skis” after an 18% rally in eight weeks and is likely to consolidate through the summer.

Speaking in a recent interview, Newton identified financials, industrials, consumer discretionary, and healthcare as the sectors best positioned to play catch-up as technology cools. He noted that the XHS healthcare services ETF recently broke to new all-time highs, calling it an encouraging sign that broadening is underway.

“I am optimistic that we can start to broaden out. I do suspect that technology is going to need to consolidate at some point in June and or July. Difficult to see an 18% rally in 8 weeks just continue at the same pace. It’s highly unlikely, and we’re going to need to consolidate.”

Newton said the overall market is not overextended, but many investors have been cautious amid a leadership transition at the Federal Reserve and lingering geopolitical tensions. He noted that investors who lack sufficient exposure to high-weighted semiconductor and memory names have struggled to keep pace with the S&P 500.

Newton said he is not bearish and expects the consolidation in tech between July and October to create buying opportunities heading into the midterm elections.

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