Equities Could Pull Back 5–10% Amid Market Weakness, Says Wells Fargo Investment Strategist – Here’s Where They’re Reallocating

A top Wells Fargo investment strategist is warning that US equities could fall back as far as 10% amid current market weakness.

In a new CNBC interview, Wells Fargo Head of Global Investment Strategy Paul Christopher warns that equities could step back even further after a rough week for US stocks.

“The concentration question is important for investors here. You’ve got ten stocks that basically account for 40% of the market cap of the S&P 500. And so on days like this, where you have maybe some weakness in the economy and much of the market is a little bit on the soft side, you might have a couple of stocks that have big market caps that could push the overall index up. And so for the last month, we’ve seen this kind of back and forth between soft data that pushes most of the stocks maybe a little bit lower, but then you get a good earnings report from one of those top ten and it drags the market up higher.

So that’s why you’re seeing the market really not making a whole lot of progress. Yes, there have been some new market highs, all-time highs, but there’s just been a lot of chop in the last month. So investors should start taking some steps, we think, to prepare for perhaps some weaker numbers in the economy and some weaker numbers in the stock market over the next few weeks.”

According to the Wells Fargo strategist, the market is edging toward a near-term top.

“We think there is the potential for some choppiness to continue and maybe turn into some more pronounced weakness, maybe a pullback of 5%, 7%, perhaps even 10%. So we would be trimming here. We’re going to keep our overweight to large-cap stocks. We do believe in the tech story. We do believe in the artificial intelligence story. But we could reduce some of those holdings. For example, we were favorable on information technology and communication services.

We decided to go back to neutral on communication services. That’s a very concentrated sector—two constituents of that sector account for roughly 70% of the market cap of that sector. So let’s pull back a little bit, recognizing concentration but keeping the overweight on information technology. We think that’s a good way. And then recycle, maybe recycle those proceeds perhaps into some fixed income.”