MW The 'sugar high' is over. Why the first sell signal for stocks since 2021 is now flashing, says this Wall Street bank.
By Barbara Kollmeyer
Get ready for data and geopolitics to matter again
Wells Fargo is cautioning that the stock market has used up a lot of "sugar high" positives, and the road ahead gets a little tougher.
Investors looking for more stock-market records may get them on Wednesday as fresh hopes of an Iran-war solution make the rounds. That's after this year's market heroes - chip stocks - helped drive new highs for the S&P 500 and Nasdaq on Tuesday.
But not everyone is feeling so at ease with how things have been going lately. In our call of the day from Wells Fargo, strategists warn that the easy road for stocks is over, and a sell signal has been triggered for equities, the first in years.
"Our 'sugar high' call has largely played out, with just 1.4% upside to our 7,300 midyear target," a team led by Ohsung Kwon, Wells Fargo's chief equity strategist, told clients in a May 4 note.
Last month, they laid out several "sugar high" factors expected to drive the S&P 500 SPX to that target by July. Those included: tax benefits via President Donald Trump's One Big Beautiful Bill Act (OBBA); lower tariffs after a February Supreme Court ruling; and an Iran-war driven supply-chain shock boosting manufacturing and many industrial names.
With those positives now played out, the path higher for stocks gets a little tougher. They said their contrarian sentiment indicator has triggered a "sell" signal for the first time since November 2021. That indicator is generated from five inputs: the S&P 500 price, the put-call option ratio, positioning by professional investors on the S&P 500 futures contract, fund flows into exchange-traded funds and the cost of buying out-of-the-money put options.
Historically, the S&P 500 has fallen 2% on average over the next 1 to 3 months and declined 53% of the time once that sentiment indicator is triggered, Kwon says. "So it historically has been more neutral/sideways with a slight downside tilt," Kwon told MarketWatch in emailed comments.
Kwon and his team said they're stopping short of an "outright bearish" stance on stocks due in part to a secular AI tailwind. Additionally, their liquidity indicator just triggered a buy signal, and "liquidity drives speculation, and typically benefits tech + financials outperformance."
With most S&P 500 companies having now reported earnings, the strategists see market attention refocused on macro factors and the war in Iran and its resolution, or not.
That's as they expressed concern that the entire playbook for April's dazzling stock gains was "end of the war." For example, stocks most likely to gain from the war - Chevron $(CVX)$, Exxon (XOM), Shell $(SHEL)$ and LyondellBasell $(LYB)$ to name a few - underperformed in April versus those most likely to struggle - such as Delta Air Lines $(DAL)$, American Airlines $(AAL)$, Airbnb $(ABNB)$ and Expedia (EXPE).
"With stocks at their highs amid rising oil and rates, we believe stocks are underpricing the war risk," they said.
Apart from geopolitical headlines and Nvidia (NVDA) earnings due later this month, the strategists flagged events like payrolls data for Friday and consumer prices next week, with the midmonth summit between Trump and China President Xi Jinping also seen as a potential pivotal event for markets.
"In our view, good news from macro data will be good news for markets. Cuts have been priced out and the market already sees a hike as the more likely next move from the Fed," said Kwon and his team.
They are more cautious regarding the second half of the year, where they expect "the oil shock will likely slow consumption with a delay," as an OBBB tax-return cushion on higher energy prices runs out.
"We continue to see rising risk of a 'growth down/inflation up' backdrop in 2H, the worst for stocks," they added. Agriculture prices, in particular, are worth watching, given a 13% surge from February lows, they said.
As for regional preference, Wells Fargo favors U.S. stocks over international ACWX. U.S. energy independence, which they said helped the S&P 500 outperform in April, will continue to matter going forward until the Iran war is resolved.
Kwon and the team recommended owning the Nasdaq 100 QQQ, and said to "own AI, but add hedges," though the strategists did not offer specifics on the latter. Kwon told MarketWatch that "we think hedging out the war risk makes a lot of sense here."
The strategists said recent earnings offered positives for hyperscalers, such as rising cloud revenue that pointed to more signs of monetization, while signs of increased semiconductor capital expenditure continue to fuel that sector's bull case.
But sentiment for semiconductors remains the most bullish among investors, and remains a contrarian sell for Wells Fargo, along with tech hardware, they said.
Least-loved software and commercial and professional services remain on the bank's contrarian buy list. Sentiment for healthcare equipment and services weakened further, triggering a new buy signal, said the strategists.
Read: The last time semiconductor stocks rose this far this quickly, the dot-com bubble burst
The markets
U.S. stock futures (YM00) (ES00) (NQ00) are surging and oil (CL.1) (BRN00) is sinking on Iran-U.S. peace-deal hopes. Bitcoin (BTCUSD) is nearing $82,000, with gold (GC00)and silver (SI00) higher.
Key asset performance Last 5d 1m YTD 1y S&P 500 7259.22 1.69% 9.71% 6.04% 29.47% Nasdaq Composite 25,326.13 2.69% 15.03% 8.97% 43.17% 10-year Treasury 4.352 -8.20 5.10 18.00 7.80 Gold 4703.9 3.20% -0.87% 8.58% 39.47% Oil 94.87 -12.55% -1.69% 65.25% 63.71% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
A one-page U.S.-Iran deal could be close, Axios reported. That comes after President Trump said he was pausing Operation Freedom in the hopes of getting an agreement done.
Advanced Micro Device stock $(AMD)$ is climbing after a beat-and-raise earnings report and strong AI chip demand, which is also lifting shares of Intel $(INTC)$ and Arm $(ARM)$.
Shares of chip-equipment maker Astera Labs (ALAB) are higher following an earnings beat and a new product announcement.
AI server maker Super Micro's shares $(SMCI)$ are soaring as its gross margins rebounded.
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Novo Nordisk (NVO) said weekly prescriptions have surged for its new weight-loss drug pill.
Upstart stock (UPST) is slumping after mixed results from the AI lending company.
ADP employment data for April will be released at 8:15 a.m. St. Louis Fed President Alberto Musalem is due to speak at 9:30 a.m. followed by Chicago Fed President Austan Goolsbee at 1 p.m.
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-Barbara Kollmeyer
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