As the Middle East situation shows signs of easing, market sentiment has gradually improved, and coupled with investors’ digestion of expectations for Federal Reserve rate hikes, Wells Fargo (WFC) Securities has raised its year-end target levels for major U.S. stock indices. The firm raised its end-2026 target for the S&P 500 Index (SPX) from 7,300 to 7,950, implying roughly 5% upside from recent closing levels. The adjustment comes just as the U.S. and Iran are scheduled to formally sign an interim peace agreement in Switzerland this Friday, with the market broadly believing that the agreement is expected to end months of conflict and promote the resumption of normal navigation through the Strait of Hormuz, thereby alleviating global energy supply pressures.
Wells Fargo equity strategist Ohsung Kwon said that the easing of relations between Washington and Tehran is reducing the market’s concerns about the macroeconomy. The inflationary pressures that had previously arisen from rising oil prices are expected to gradually subside, while market sentiment has cooled from earlier excessive optimism to a relatively neutral level, providing new upside room for AI-related sectors. Kwon pointed out in his report that market sentiment has completed a reset, creating conditions for the AI trade to regain strength. Based on this judgment, the firm advises investors to continue allocating to the semiconductor sector and increase holdings of cyclical stocks, believing that as the Middle East conflict gradually ends, economically sensitive sectors are expected to see catch-up rallies, while defensive sectors that were previously favored may lag behind relatively.
Although the market’s focus is shifting from geopolitical risks to the first Federal Reserve policy meeting chaired by new Fed Chair Warsh, Wells Fargo believes that market expectations for the start of the “Warsh era” are relatively moderate. Kwon emphasized that inflation remains the biggest risk factor facing U.S. stocks at present, but only if the Fed chooses to respond to inflation through further rate hikes. He pointed out that if the Fed allows the economy and inflation to remain somewhat elevated in the future, rather than adopting aggressive tightening policies, then stocks will still be one of the most effective assets against inflation. If policy choices allow the economy to run moderately hot and gradually digest debt pressures through inflation, this environment is actually favorable for stocks.
Meanwhile, the latest monthly fund manager survey released by Bank of America (BAC) shows that the rally in artificial intelligence stocks is still expected to continue. The survey covered investors managing a total of $465 billion in assets, with the survey window from June 5 to 11. The results showed that about 56% of global fund managers chose the word “boom” to describe the current phase of the AI cycle, believing that the market rally continues to gather momentum and attracts more investors to enter for fear of missing out. Only 21% of respondents believe the sector has entered a “frenzy” phase where valuations are being pushed to extreme levels, while another 9% described AI as being in a “profit-taking” phase.
These survey results echo recent market performance. Although the AI sector experienced a sharp sell-off at the beginning of the month, with the Philadelphia Semiconductor Index plunging more than 10% in a single day and the Nasdaq falling over 4%, the market subsequently rebounded quickly, with the Philadelphia Semiconductor Index surging past historical highs and closing at a record high. However, the survey also revealed investors’ deeper concerns: as many as 80% of respondents believe that buying and holding global semiconductor stocks is currently the most crowded trade, marking the highest reading in the survey’s history, reflecting that capital concentration in AI hardware has reached an extreme level. Despite the still-strong AI narrative, fund managers have begun making defensive adjustments, trimming their tech sector overweight from 33% to 26%, and reducing their global stock overweight from 50% to 38%.
