Wells Fargo, one of the largest US banks, has softened its bearish stance on AI chip and data-center stocks, saying that a sharp selloff has made valuations look more reasonable. The bank's analysts, led by Ohsung Kwon, noted that the recent 38% decline from June highs has already priced in a cooling phase for AI-driven profits.
In a research note, the bank argued that current prices imply roughly 8% year-on-year earnings growth for these companies. That is a far cry from the explosive growth seen during the AI boom, but it suggests that the market has already adjusted to a slower, more sustainable pace.
Why the selloff happened
The AI chip sector has been one of the most volatile corners of the stock market. After a massive rally fueled by enthusiasm over generative AI and the data-center buildout, shares of chipmakers and related suppliers have pulled back sharply. The 38% slide from June highs reflects growing investor caution about whether the AI spending spree can continue at the same breakneck pace.
Wells Fargo's note suggests that much of that pessimism is now baked into stock prices. With valuations more in line with reality, the bank sees less downside risk from here. However, it also flagged a longer-term concern that could resurface in a few years.
The 2028 risk
The bank's analysts pointed to a specific risk that sits a few years out: the AI buildout could flip from helping earnings to hurting them in 2028. The logic is straightforward. Heavy capital spending—money spent on long-lived equipment like servers and data centers—lifts revenue and profits in the short term as companies race to build out AI infrastructure. But eventually, that spending needs to generate returns. If the revenue from AI doesn't materialize as expected, the depreciation and interest costs from all that capital expenditure could start eating into earnings.
This is a common pattern in technology cycles. Companies invest heavily in new capacity, and for a while, that investment drives growth. But if demand doesn't keep up, the same investment becomes a drag on profitability. Wells Fargo is essentially saying that the market has already accounted for a near-term slowdown, but the 2028 risk is not yet fully reflected in prices.
What it means for investors
For everyday investors, this note is a reminder that the AI trade is not a one-way bet. The recent selloff has made valuations more attractive, but the long-term picture is murkier. If you own AI chip stocks or funds that hold them, it's worth understanding that the sector could remain volatile as investors weigh near-term earnings against longer-term risks.
Wells Fargo's shift is notable because it comes from a major bank that had previously been more cautious. When a big institution changes its stance, it can influence market sentiment. But it's important to remember that analyst notes are just one input—they are not a guarantee of future performance.
The broader market context also matters. AI chip stocks have been a key driver of index gains, and their recent slide has weighed on tech-heavy benchmarks. In fact, AI chip suppliers helped lead Asian stocks higher after a Nasdaq surge, showing how interconnected these moves are across global markets.
Investors should also keep an eye on how the AI spending cycle evolves. If companies continue to pour money into data centers and servers, that could support chipmakers in the near term. But the 2028 warning is a reminder that today's capital spending could become tomorrow's earnings drag.
Looking ahead
Wells Fargo's note is likely to be followed by other banks and analysts reassessing their views on the sector. The key question will be whether the 38% decline was a healthy correction or the start of a longer downturn. The bank seems to think it's closer to the former, at least for now.
For those watching the market, the next few months will be crucial. Earnings reports from major chipmakers and data-center operators will provide clues about whether the AI boom is slowing. If companies continue to beat expectations, the sector could recover. If not, the 2028 risk might arrive sooner than expected.
In the meantime, investors should focus on diversification and avoid making big bets based on a single analyst note. The AI story is still unfolding, and while the selloff has made valuations more reasonable, the path forward is far from certain.
