'Music stops when AI capex stops. Enjoy the party': Wells Fargo

Wells Fargo analysts project the S&P 500 to reach 6,650 by end-2025 and 7,200 by end-2026, underpinning a bullish outlook primarily driven by expectations of continued AI capital expenditure and robust profit growth, with 2026-2027 EPS anticipated to rise 11-12% year-over-year. The bank's PRSM framework notes favorable rates and improving macro conditions, while current tech spending remains modest relative to past cycles. Key risks include tariffs impacting earnings, leading to a preference for B2B over B2C companies, with the ultimate bull case resting on AI-driven productivity offsetting fiscal deficit-induced devaluation.

Analysis

Wells Fargo analysts have issued a bullish forecast for U.S. equities, projecting the S&P 500 will reach 6,650 by year-end 2025 and 7,200 by the end of 2026. The core of this thesis is the sustained capital expenditure in Artificial Intelligence (AI), with the bank stating the bull market should persist as long as AI investment continues. This outlook is supported by their PRSM framework, which identifies robust profit growth as a primary driver, with earnings per share (EPS) expected to increase by 11% year-over-year in 2026 and 12% in 2027. The framework also notes slightly positive conditions for rates, neutral sentiment, and a fourth consecutive month of macro improvement. Contextually, the report suggests significant runway for this trend, noting that current tech equipment spending is just 2.0% of GDP, below the 2.6% during the PC boom and 2.9% in the internet era. Key risks cited include potential tariffs, which could create a 4% EBIT headwind for heavy importers. Consequently, the analysis favors B2B-focused firms over B2C due to stronger pricing power. The ultimate bull case rests on a potential AI-driven productivity cycle offsetting a currency devaluation cycle caused by rising fiscal deficits and inflation.

Key Decisions for Investors

• Investors should evaluate their portfolio's exposure to the AI capital expenditure theme, as the continuation of this spending is the central pillar of the bullish forecast.
• Consider overweighting B2B-focused companies, particularly in the technology sector, as they are identified as having stronger pricing power and may be more resilient to the outlined tariff and inflation risks.
• Monitor AI-related capital spending trends and developments in trade policy, as a slowdown in AI investment or the implementation of significant tariffs represent the primary threats to this market thesis.
• Pay attention to the interplay between productivity gains and inflation/fiscal deficit data, as the long-term bull case depends on the former's ability to counteract the latter's devaluation pressures.