US equities are poised for a potential summer rally. Wells Fargo suggests that with the fading impact of quarter-end rebalancing, the onset of a historically strong seasonal period, an influx of new buying interest, and the possibility of better-than-expected second-quarter earnings, the stock market could see further gains in July.
Strategist Ohsung Kwon and his team at Wells Fargo released a report on Monday, noting that recent market volatility was largely influenced by quarter-end rebalancing, a factor expected to diminish as July progresses. The report highlights historical data from the past century, showing that the first half of July is the strongest period of the year for the S&P 500, delivering an average return of 1.35%.
Key Market Drivers
Notably, the team argues that the delay in IPOs for AI unicorns like OpenAI and Anthropic is not a negative development but rather creates a buying opportunity for the AI sector. The report states plainly: "Buy the dip in AI; IPO delays could be a positive."
Dual Benefits from IPO Delays
While the market previously viewed the postponement of major AI company IPOs as a factor weighing on tech stocks, Wells Fargo believes the event is actually beneficial for the AI sector. The report posits that, on one hand, fewer large new share offerings mean reduced pressure from capital being diverted away from existing stocks. On the other hand, token prices for computing power, which were inflated by companies preparing for listings, are expected to decline. Lower token prices could incentivize corporate clients to expand their use of AI, boosting demand for computing power and thereby extending the upcycle for AI infrastructure.
Concurrently, Wells Fargo's proprietary market sentiment indicator has recovered from a sell signal in May to a neutral level. Quantitative funds, which underwent significant deleveraging in the final week of June, have also largely returned their positions to neutral, indicating a clear alleviation of the previously accumulated oversold pressure in the market. Two weeks ago, Wells Fargo raised its year-end target for the S&P 500 from 7,300 to 7,950 points.
New Capital Inflows and Earnings Potential
Capital flows also form a key part of Wells Fargo's bullish thesis. The report estimates that the newly introduced "Trump accounts" for eligible children are expected to bring approximately $20 billion in passive inflows, with funds primarily allocated to large US stocks. While this amount is only about 3% of the annual inflows into US 401(k) pension plans, Kwon points out that unlike the typically diversified allocations of 401(k)s, this new capital is expected to flow more concentratedly into US equities, potentially providing more significant marginal support for large-cap stocks.
Wells Fargo also anticipates that the second-quarter earnings season, beginning in two weeks, could serve as an important catalyst for the market's next phase. The bank forecasts that the year-over-year earnings per share growth for S&P 500 constituents will improve from 19% in Q1 to 22% in Q2, with tariff rebates being a significant factor driving potential earnings beats. The report estimates that about $36 billion in rebate funds have already been distributed, with a further $90 billion potentially awaiting disbursement. The consumer staples and industrial sectors are expected to be among the primary beneficiaries.
Wells Fargo further notes that many companies have not yet incorporated these rebate benefits into their prior earnings guidance, suggesting that as the earnings season unfolds, there remains room for further upward revisions to profit forecasts.
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