Tech Sector Downgraded Amid AI Bubble Fears

As of November 13, 2025, the AI trade led by Nvidia has been regaining momentum after a recent downturn, but concerns over the sector's valuation and potential bubble-like conditions are weighing on investor sentiment.

According to a report from Wells Fargo Investment Institute, the firm has downgraded the S&P 500's information technology sector, which includes many of the major players in the AI space, from a favorable to a neutral rating. The primary reason cited is the surge in valuations, which has the WFII team worried about the sector's susceptibility to potential disappointments.

While the analysts acknowledge the strong tailwinds driving sales and earnings growth in the AI-focused tech companies, they note that valuations have skyrocketed. In the period from April 4 to October 24 of this year, the IT sector rose 60%, outperforming the broader S&P 500 by more than 25%. However, the WFII team believes that the overly bullish sentiment and elevated expectations make the sector vulnerable to even modest earnings misses or other negative surprises.

The report also points to ongoing trade tensions between the U.S. and China as a potential risk factor, as well as investor concerns about the return on investment and debt financing for the significant capital expenditures being made to support the AI boom. As a result, the WFII team is recommending that investors trim their exposure to the IT sector and instead consider allocating funds to the industrials, utilities, and financials sectors, which they believe can provide exposure to the AI trend while offering lower valuations.