Institute Alert

• Artificial intelligence (AI) and valuations for tech-related companies are returning to the spotlight, as equity markets shift their focus from the Middle East war towards the sustainability of tech-related spending amid rising global interest rates.
• The South Korean equity KOSPI Index fell 10% overnight, after reaching an all-time high earlier this week. The turn in sentiment spilled over into U.S. markets with the S&P 500 Index and tech heavy NASDAQ Composite being down 1.6% and 2.2%, respectively on an intraday basis on June 23.
• The U.S. and Iran signed the initial stage of peace agreements last week. However, we see complacency in markets with oil prices back near $70 per barrel.
• Facing energy-related price inflation, central bank authorities in Europe, Japan, Norway, and Australia have already begun raising policy rates, and the Federal Reserve (Fed) policy-making committee members increased their interest rate projections for 2026, signaling the potential for additional rate hikes before year-end.
• The U.S. 10-year Treasury yield is lower intraday today but well within its range for June.

• We continue to expect double-digit earnings growth in the S&P 500 Index, supported by a resilient economy and the structural shift toward AI adoption, which we believe benefits enterprises beyond the tech sector.
• We believe that interest-rate increases are responding to inflation pressures that energy shortages have created.
• We anticipate that global energy prices may rise in the near term but that a return to oil and natural gas flows similar to pre-war rates will return later this year and into 2027.
• While higher interest rates generally remain a risk for volatility in global equity markets, our view is that interest rates may return to previous levels as the energy shock fades.

• Investors are facing a rapidly evolving landscape which will likely lead to additional market volatility. However, this does not derail our outlook, and we continue to favor using market volatility as opportunities to re-balance portfolios.
• We see diversification opportunities in Fixed Income and Commodities, where attractive bond yields and exposure to Precious and Industrial Metals can help improve portfolio resilience amid market volatility.

First, we believe investors should remain disciplined and avoid overreacting to short-term market volatility. Volatility and shifting headlines were a key theme of our 2026 Outlook, and we continue to see equity markets supported by fundamental strengths, including a resilient U.S. economy, along with robust revenue and earnings growth for U.S. Large Cap companies. Therefore, we maintain our overweight to equities and believe investors are best suited in maintaining allocations to U.S. Large Cap Equities as they are better positioned to navigate market volatility due to their strong balance sheets and track record for earnings.

Second, we continue to favor Information Technology and AI-related sectors. Although valuation concerns have resurfaced, the sector has continued to deliver double-digit revenue and earnings growth well above the broader S&P 500 Index. Additionally, we emphasize that the key drivers of the AI investment cycle, including the need for digital infrastructure, rising computing demand, and enterprise adoption remain intact. We view these trends as structural changes that should drive sector performance over the coming years, and benefit enterprises beyond just tech. Given the recent pullbacks, our view is that the case for long-term investors does not weaken but instead strengthens as those looking through the recent volatility can gain exposure to high quality tech companies at more attractive valuations.

Third, investors seeking to broaden diversification beyond tech may want to consider opportunities in Industrials, Materials, Utilities, and Financials. We believe these sectors currently offer attractive valuations while maintaining meaningful exposure to long-term themes including infrastructure investment, electrification, rising power demand, and AI-related capital expenditure.

Lastly, investors can potentially further strengthen portfolio diversification by considering positions in Fixed Income and Commodities. Fixed Income yields have become more attractive, which could provide a source of income to help smooth portfolio returns amid market volatility. We remain favorable on Intermediate-term Treasuries, though would view opportunities in other maturities across the curve offering increasingly attractive yields. We remain neutral on Commodities, but view them as an effective portfolio diversifier and hedge against inflation risks. Specifically, we see opportunities for investors to rotate exposure from energy, where we see downside risks, and into Precious Metals or Industrial Metals. 

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Investing in precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

Korea Composite Stock Price Index (KOSPI) is a capitalization-weighted index of all common shares on the Korean Stock Exchanges.

NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the U.S. stock market.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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