MW Sure, there's a risk of a bubble in AI stocks, so invest in them, says Wells Fargo strategist

By Barbara Kollmeyer

Ohsung Kwon says don't give up on AI stocks now

If AI is in a bubble, investors want to be on the right side of that, says Wells Fargo's chief equity strategist Ohsung Kwon.

One of the biggest questions facing investors and Wall Street right now surrounds the longevity left in the AI trade.

The Nasdaq Composite COMP dropped to its worst level in a month on Tuesday, as some analysts raised concerns that Nvidia was creating a "circular" trade - investing in companies that then purchased its chips, following its blockbuster $100 billion OpenAI deal (or, more accurately, potential for a deal).

Our call of the day from Wells Fargo's chief equity strategist Ohsung Kwon says don't be tempted to fade or sell the AI trade, which he expects will continue to dominate and keep the rally narrow. That is, until one beaten-down sector starts showing signs of life.

"We're essentially selling the news that we're in an easing cycle. We're rotating back into AI," Kwon, who began heading up the equity strategy team in August following the departure of Christopher Harvey, told MarketWatch in an interview on Tuesday. They are recommending that investors sell cyclical stocks that ran up ahead of the Fed interest-rate cut.

And while he sees signs of "froth" in AI, as long as crucial capital expenditure stays intact, the bull market continues for now.

"We don't think it's a bubble yet, but there's a chance that AI becomes a bubble and you want to own the right tail risk of that," Kwon said. In other words, investors should be exposed to the "chance of AI becoming a bubble," he explains.

In a recent note to clients, the strategist discussed how the prior tech bubble survived several crisis before collapsing, including the Asian financial crisis, the ruble crisis and 175 basis points of rate hikes. Bank of America strategists also recently discussed how the tech sector rose 61% six months before its 2000 bubble peak.

As for which AI stocks to own, Kwon said they are focused on the "capex takers," such as semiconductor stocks that benefit from AI spending. "I do think the AI capex cycle turning is probably the single biggest risk to the market right now," he said, but added they "don't see any sign of that turning."

A recent chart from Kwon showed that tech capex spending still hasn't reached the heights of the past for the sector:

Kwon said the market is shifting right now, away from rate-sensitive areas of the market that rallied so much. The focus is swinging from rates to fundamentals such as earnings growth "and fundamentally, the best companies in the world right now are AI companies," he said.

However, the onus will be on those companies to show good earnings, and AI providers exhibiting more monetization to drive up stock prices. "And for semis, the capex takers, I think they're going to continue to do well, because the AI capex is going to continue to grow," he said.

Kwon said the other area they are increasingly bullish on has to do with a capital-market recovery in merger-and-acquisition and IPO activity, benefiting investment banks. Goldman Sachs $(GS)$, JPMorgan Chase $(JPM)$ and Morgan Stanley $(MS)$ each hit record highs on Tuesday. While that part of the market is "starting to work," he said the stock market rally will continue to stay narrow, dominated by the AI players.

His year-end S&P 500 SPX target is 6,650, with 7,200 targeted for the end of end 2026. "I think the winners are going to continue to win," he said.

That said, Kwon said one particularly troubled area of the economy merits close scrutiny going forward.

"Unless the housing market starts to improve, I don't think the manufacturing cycle is really going to turn. And if that's the case, I think we're going to see a continuation of the narrow market, but if housing were to recover, then I think things are going to broaden out. For that to happen, we need rates to be lower," he said.

Kwon said he's less focused on house prices and more on activity. "Everything we heard in the past couple of weeks has been negative."

Read: Here's a bigger risk for the housing market than what the Fed could do to mortgage rates

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are modestly higher. Gold (GC00) is pulling back, not far from a record high.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              6656.92    0.86%   2.71%   13.18%   16.33% 
   Nasdaq Composite                                                     22,573.47  1.40%   4.55%   16.90%   24.84% 
   10-year Treasury                                                     4.107      2.20    -13.20  -46.90   31.90 
   Gold                                                                 3806       2.11%   10.54%  44.20%   41.90% 
   Oil                                                                  63.51      -1.61%  0.32%   -11.63%  -11.22% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Micron shares $(MU)$ are climbing after the tech group delivered a stronger-than-expected outlook, as AI fueled strong demand for its memory chips.

Alibaba's $(BABA)$ CEO Eddie Wu announced he'll spend more than the $53 billion previously targeted on AI investment as the Chinese giant rolled out a new large language model and a partnership with Nvidia (NVDA).

Amazon.com (AMZN) was upgraded to overweight by Wells Fargo.

A Reuters report the U.S. government was considering a stake in Lithium Americas (LAC) boosted the stock.

Jimmy Kimmel returned to the airwaves on Walt Disney-owned $(DIS)$ ABC.

New-home sales are due at 10 a.m.

Best of the web

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The chart

U.S. households holding high amounts of stocks has historically been bearish for long-term returns, notes Ned Davis Research strategist Rob Anderson. His chart plots household equity allocation (blue line) against 10-year returns (orange line). He pointed to recent Fed data showing households held $51.1 trillion in stocks at the end of the second quarter, a record-high allocation of 50.5% of total household financial assets. While not a great short-term indicator, "investors should expect a downshift in the magnitude of returns during the next 10 years compared to the last 10," he said.

Top tickers

These were the top-searched stock-market tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   BABA    Alibaba 
   MU      Micron Technology 
   PLTR    Palantir Technologies 
   OPEN    Opendoor Technologies 
   TSM     Taiwan Semiconductor Manufacturing 
   NIO     Nio 
   AAPL    Apple 

Random reads

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Speaking of big beasts: massive 50-pound, 70-foot jellyfish are washing up on Texas coast.

-Barbara Kollmeyer

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September 24, 2025 06:24 ET (10:24 GMT)

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