It's one of the first major Wall Street institutions to lower its expectations for stock-market performance since the spring

Wells Fargo strategists lowered their S&P 500 target.

It what may be a first since the early days of the war between the U.S. and Iran, a Wall Street firm is lowering rather than raising its S&P 500 year-end target.

Wells Fargo on Tuesday reduced its S&P 500 target to 7,700 from 7,950, after the index SPX closed Monday just below 7,620, up 11% on the year.

So-called top-down strategist forecasts are not as extensively tracked as Wall Street price targets on individual companies.

Strategists led by Ohsung Kwon say the downgrade come even as the firm is growing more optimistic on earnings per share - targeting $425 next year for S&P 500 companies and $460 in 2028.

That's very optimistic. In a separate note, Bank of America analysts said the top-down consensus by strategists for 2027 EPS was $392. The so-called bottom-up projection - that is, adding up all the estimates of S&P 500 companies and then weighting by market cap - is $417.

However, the Wells Fargo team believes the market is "entering late innings of the cycle, arguing for multiple compression." That refers to the multiple investors assign for each dollar of earnings. While they are not worried about 2027 EPS, they are concerned that AI capital expenditure might slow, eating into 2028 earnings.

Wells Fargo says 2027 EPS estimates look extreme.

Wells Fargo argues 2027 earnings will be "cyclically elevated by 42%" compared to the trendline of what S&P 500 earnings should be at this stage of the economic cycle. That gap of 42% is the highest since the 1950s, they say.

By sector, Wells Fargo is lowering tech to equal-weight from overweight while raising healthcare to overweight from equal-weight. Within tech, Wells Fargo prefers software to microchips.

Tech stocks XLK have jumped 28% this year, while healthcare XLV has climbed 9%.

"We see the midterms as a potential risk to tech, especially as political pushback against data centers continues to gain momentum," the firm said.

A potential Democratic sweep would be seen as a positive for healthcare, potentially setting the stage for a restoration of the enhanced Affordable Care Act subsidies, the firm added.

Earlier this week, Bank of America increased its year-end target, albeit to levels still below Wells Fargo's new target. BofA sees the index ending at 7,400, versus 7,100 previously, as it launched a 12-month target of 7,800.

-Steve Goldstein