Wells Fargo Says the AI Spending Math Breaks in 2028 and Just Cut Its S&P 500 Target to 7,700
Wells Fargo's chief equity strategist sees a spending cliff forming inside the AI buildout, and the arithmetic he uses to locate it points to a very specific year when the math stops working for hyperscaler earnings.
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Wells Fargo cut its year-end S&P 500 target to 7,700 from 7,950. Chief equity strategist Ohsung Kwon framed the reduction around hyperscaler capital spending rather than a valuation call.
The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) closed at 767.83 on September 23, 2026, with a 12.6% year-to-date gain and 15.77% one-year advance.
Against a market that has already delivered solid gains, a flat-to-slightly-lower year-end target signals a real change in expected return. The argument below focuses on the rising burden on hyperscaler earnings rather than headline valuation.
Escalating Justification Burden
Kwon’s mechanism is that each additional capex year raises the demand bar for prior asset bases. Hyperscalers will spend $1.5 trillion next year, and Kwon says 2027 is locked.
The math turns steep after that. Kwon says the demand needed to justify current spending is roughly $1.4 trillion, and another trillion-dollar capex year in 2028 would push the required demand figure to about $2.2 trillion.
A capex boom flatters earnings because companies capitalize spending rather than expense it. The punishment arrives as those assets depreciate on shorter schedules than the market prices in.
Kwon argues the current earnings run is inflated on exactly this timing gap. He estimates next year’s EPS will be about 42% above Wells Fargo’s normalized EPS figure, and he calls the coming ten-year EPS cycle one of the strongest in history, only surpassed by the 1950s bull market.
Allocation Statistic Is About Positioning
Kwon’s second concern is crowding. He estimates equity allocation at roughly 72% against 28% bonds, which he says is the highest equity share since 1969.
When the marginal buyer is already committed, interest rates matter less than their volatility. The 10-year Treasury yield sat at 4.96% on September 22, 2026, near a one-year high of 5.01%, and the VIX closed at 14.21, deep in complacency territory.
Low implied volatility inside crowded positioning is the setup that historically converts a modest shock into a large move. Riding a mania is fine as long as you plan the exit, which is the argument our free bubble survivor’s handbook spends most of its pages on. You can also find the firm’s ongoing equity work on the Wells Fargo Investment Institute research page.
What Kwon Is Actually Recommending
He is rotating within equities rather than reducing exposure. Kwon favors quality over high beta and singles out health care as a defensive sector that is less rate-sensitive than the classic bond proxies.
That is the fair read of a strategist who thinks the cycle overshoots rather than collapses. SPY’s own weightings make the tension visible: NVIDIA sits at 7.58% of the fund, Apple at 6.66%, Microsoft at 4.91%, Amazon at 3.64%, Alphabet’s two share classes together above 5%, Broadcom at 2.62% and Meta at 2.24%, so the AI capex debate is roughly a third of the index.
The bull case is that next year is already locked. If hyperscalers spend the $1.5 trillion Kwon expects and beat, the bear thesis has no catalyst for close to a year, and an early correct call tends to look wrong to anyone holding the position.
Broad earnings strength supports that patience. SPY has returned 255.49% over ten years, and the index has repeatedly punished investors who sold on capex math they thought was obviously stretched.
The bear case, per Kwon, combines crowded positioning at a 1969-style equity share, earnings running about 42% above normalized levels, and an AI spending cycle whose justification hurdle rises annually. The deciding variable is when depreciation hits hyperscaler operating margins.
Until it does, the market favors owners. Once it does, the gap between reported and normalized earnings stops being a talking point and becomes a reported figure.
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Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth, cyclical, and dividend equities that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as penny stocks.
