Current environment still good for stocks, with some trimming and diversification – Wells Fargo

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Wells Fargo Investment Institute senior global market strategist Scott Wren said the markets will continue to inch upward despite recent rejections at higher levels, though he warned the risks of a significant pullback have increased.

In an interview with CNBC, Wren explained his firm has been adjusting its investment strategy by trimming positions in sectors they consider fully valued, including communication services (XLC [https://seekingalpha.com/symbol/XLC]) and small caps (IWM [https://seekingalpha.com/symbol/IWM]). He said the communication sector (XLC [https://seekingalpha.com/symbol/XLC]) has been “fully valued.”

Wren also said his team has maintained an overweight position in technology (XLK [https://seekingalpha.com/symbol/XLK]) but shifting investments toward industrials (XLI [https://seekingalpha.com/symbol/XLI]) and utilities (XLU [https://seekingalpha.com/symbol/XLU]) as a different approach to AI exposure, while financials (XLF [https://seekingalpha.com/symbol/XLF]) remain their most overweighted sector.

Regarding earnings season expectations, Wren said he views the process primarily as confirmation rather than revelation. He added that previous quarters “blew away expectations” and he anticipates third-quarter results will again exceed the current 7-8% growth forecast.

The strategist emphasized AI capital expenditure as a critical driver for continued market growth.

“This AI capex conversation, where people either say, ‘Yeah, we’re going to still spend the money we’ve been telling you we’re going to spend,’ or ‘We’re going to increase what we’re going to spend.’ That needs to happen to keep pushing this market higher,” he said.

Despite uncertainties around government shutdowns affecting economic reports, Wren remains optimistic about market fundamentals.

“We’re going to have decent growth,” he said. “Inflation, while it may tick a touch higher here in the near term, as we go through the middle of next year, it’ll be a little bit lower,” concluding that “modest growth, inflation that’s under control, good capex spending, consumer spending is hanging in there… that’s good for stocks.”

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