Banking titan Wells Fargo is unveiling a scenario that could trigger a correction for artificial intelligence (AI)-focused stocks.
In a new CNBC interview, Chris Harvey, the head of equity strategy at Wells Fargo Securities, says investors are skeptical about the sustainability of stock market rallies after equities rebounded in a massive way from the April lows.
Rather than a pullback, Harvey expects the stock market to consolidate as he sees the Fed cutting rates in the coming months.
“A lot of people are looking for a pullback. They are talking about things being overextended. They’re talking about uncertainty with the Fed, and earnings and lions, tigers and bears, oh no.
I don’t know what the short term holds. I think we could see a consolidation. It’s really unclear for me, but the underlying fundamentals: still strong. We do think the Fed will certainly have to be dovish in the next couple of months, and what we also think is that rates are going to rally because the deficit, in all likelihood, while not going to be good, will probably be better than expected based on some of the tariff news that we’re getting.”
Looking at the tech sector, Harvey warns that a string of good news could hurt the AI trade. He notes that a more favorable macroeconomic landscape could stimulate risk-taking behavior and encourage investors in AI stocks to seek higher gains in other sectors.
“One thing I think that could potentially hurt the AI trade is if you do get the Fed cutting, if growth is better than expected, if rates do come down, suddenly the contrarian trade starts to look better, and you could see rotation. And I think that’s the biggest fear for AI right now.”
Popular AI names include Nvidia, AMD, Palantir, Microsoft, Meta and Google.
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