Why one Wall Street firm thinks this year's stock-market rally is running out of road

By Steve Goldstein and Joseph Adinolfi

Wells Fargo is one of the first banks to cut its S&P 500 price target since the spring. It now expects the index to rise by only 1% between now and the end of 2026.

Wells Fargo strategists have lowered their S&P 500 target.

In what may be a first since the early days of the war between the U.S. and Iran, a Wall Street firm is lowering rather than raising its S&P 500 year-end target.

Wells Fargo strategists led by Ohsung Kwon on Tuesday reduced their S&P 500 target to 7,700 from 7,950 after the index SPX closed Monday just below 7,620, up 11% on the year. The new target is penciling in further upside of just 1% for the balance of 2026.

Interestingly enough, the bank is growing more optimistic on earnings per share - targeting $425 next year for S&P 500 companies and $460 in 2028. The 2027 projection is above FactSet's bottom-up projection, calling for earnings of $417.

However, the torrid pace of earnings growth seen in recent quarters likely won't persist, and in the months ahead investors could increasingly factor this into how much they're willing to pay for stocks.

In a note shared with MarketWatch, the team flagged the possibility that investors will soon start to price in a slowdown in the pace of earnings growth in the years beyond 2027. Earnings have been rising at a notably torrid pace over the past year, with the S&P 500 tallying 50% year-over-year growth in the most recent quarter.

As a result, stock-market multiples - a measure of how much investors are willing to pay for a stock relative to a dollar of earnings - will continue to shrink. The forward price-to-earnings multiple for the S&P 500 as a whole - one of the most popular metrics for valuing stocks - has already been declining this year as rising prices in the market haven't kept pace with analysts' increasingly sunny earnings expectations.

Wells Fargo says 2027 EPS estimates look extreme.

Wells Fargo isn't worried about 2027 earnings per share, but the team expressed concerns that AI capital expenditures would slow, eating into 2028 earnings.

Wells Fargo argued that 2027 earnings will be "cyclically elevated by 42%" compared with the trend line of what S&P 500 earnings should be at this stage of the economic cycle. The gap of 42% is the highest since the 1950s, they said.

By sector, Wells Fargo is lowering its tech recommendation to equal-weight from overweight while raising healthcare to overweight from equal-weight. Within tech, Wells Fargo said it prefers software to microchips.

Tech stocks XLK have jumped 28% this year, while healthcare XLV has climbed 9%.

"We see the midterms as a potential risk to tech, especially as political pushback against data centers continues to gain momentum," the firm said.

A potential Democratic sweep of the midterms in November would be seen as a positive for healthcare, potentially setting the stage for a restoration of the enhanced Affordable Care Act subsidies, the firm added.

Earlier this week, Bank of America increased its year-end target, albeit to levels still below Wells Fargo's new target. B. of A. sees the index ending at 7,400 - versus 7,100 previously - as it launched a 12-month target of 7,800.

So-called top-down strategist forecasts are not as extensively tracked as Wall Street price targets on individual companies.

-Steve Goldstein -Joseph Adinolfi

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09-15-26 1014ET