Wells Fargo Cuts S&P 500 Target to 7,700, Warns of Another 5%-10% Drop Before Getting There

Wells Fargo isn't turning bearish on corporate profits. It's turning bearish on what investors are willing to pay for them.

In a research note dated September 14, Wells Fargo strategist Ohsung Kwon cut the bank's year-end 2026 S&P 500 target to 7,700 from 7,950, according to Reuters. That's only about 1% above the index's close of 7,619.98 that same day. At the same time, Kwon raised Wells Fargo's earnings-per-share forecasts to $425 for 2027, up from $395, and $460 for 2028, up from $425, per Reuters.

Raising earnings while cutting the price target isn't a contradiction. It's the point. Wells Fargo is making a valuation call, not an earnings call, according to the bank's own framing cited by Ground News. The bank thinks the market is entering the "late innings" of the cycle, a phase that historically comes with multiple compression even when profits keep growing.

The Math Behind the Warning

Kwon estimates investors currently hold 72% of their portfolios in equities, the highest share since 1969, according to Traders Union. With the 10-year Treasury yield near 5%, its highest level in 19 years, Wells Fargo calculates a "fair" equity allocation closer to 60%. That 12-point gap is the widest negative reading since 1969, according to Wells Fargo, wider even than during the Dot-Com bubble.

Wells Fargo also describes corporate America as "over-earning." The bank projects that 2027 earnings will run 42% above their cyclical trend line, the highest such reading since the 1950s, and expects valuation multiples to contract that year as a result, according to Yahoo Finance's summary of the note. Its Liquidity Indicator has already fallen to its lowest level of the year and is expected to keep sliding through November, while its Complacency Indicator remains elevated.

A 5% drop from current levels would put the S&P 500 back to roughly 7,239, a level last seen in June. A 10% drop would take it to about 6,858, its lowest since mid-April, according to Traders Union's breakdown of Kwon's math.

Bond Yields Are Doing Real Damage

The 10-year Treasury yield crossing 5% isn't an abstract number on a Wells Fargo slide. CNN Business reported the yield hit that threshold on a Monday this month, a level otherwise unseen since 2007, and the average 30-year fixed mortgage rate has climbed to 6.76%, up from 6.15% at the start of the year.

CNN tied the bond selloff to a mix of causes: soaring energy prices, expectations that central banks will keep rates elevated, uncertainty tied to the war with Iran, and what the network described as unchecked federal spending piling onto an already massive debt burden. Treasury Secretary Scott Bessent's efforts to calm the bond market haven't stopped yields from climbing, according to CNN.

Tech Gets Downgraded, Healthcare Gets Promoted

Wells Fargo cut its rating on U.S. technology stocks to equal weight from overweight, and lifted healthcare to overweight from equal weight. The tech downgrade followed a Monday selloff after leading AI firms called for a voluntary slowdown in development over safety concerns, according to TipRanks.

Wells Fargo also cited the November midterm elections directly. "We see the midterms as a potential risk to tech, especially as political pushback against data centers continues to gain momentum," the bank wrote, according to Reuters. Traders Union reported that Wells Fargo views a strong Democratic showing, or an outright sweep, as a positive for healthcare stocks specifically because it could restore enhanced Affordable Care Act subsidies. That's Wells Fargo's own stated reasoning for the sector call, not this outlet's assessment of the midterms.

Wells Fargo isn't alone in trimming expectations. Bank of America strategist Savita Subramanian raised her own year-end target to 7,400, still below Wall Street consensus, arguing the market is entering a seasonally weak stretch and is overdue for a pullback, according to Traders Union. Several other Wall Street firms still expect the S&P 500 to top 8,000 by year-end, according to Reuters, so Wells Fargo and BofA are on the more cautious end, not a consensus.

The Bull Case Wells Fargo Isn't Dismissing

The strongest pushback to this warning is straightforward: earnings are actually good right now. Of the 496 S&P 500 companies that reported second-quarter results, 85.7% beat analysts' estimates, according to data compiled by LSEG and cited by Reuters. The index is still up 11.3% on the year despite Middle East tensions and sticky inflation. Wells Fargo itself says it sees limited risk to its 2027 earnings numbers. The bank's caution is about 2028 and beyond, not about the fundamentals investors are looking at today.

Wells Fargo's own stock, WFC, jumped 3% after the bank published this cautious market call, and the average 12-month price target on WFC shares sits at $101.05, implying 10.5% upside from current trading levels, according to TipRanks.

The open question is what happens to the bank's 2028 estimate of $460 a share, which already sits well below the Wall Street consensus of $487, according to Yahoo Finance. Wells Fargo has tied that gap directly to whether hyperscalers keep spending on AI infrastructure at current levels. With the bank's own Liquidity Indicator projected to keep falling through November and the midterms landing in the same window, the next several weeks of tech earnings and capex guidance will show whether Wells Fargo's caution was early or right.