Wells Fargo upgrades software stocks as macro will start to favor high-growth firms

© Reuters. Wells Fargo upgrades Software stocks as macro will start to favor high-growth firms

By Senad Karaahmetovic

Wells Fargo equity analysts are growing increasingly more positive on high-growth, risky stocks.

After a challenging 2022, Wells Fargo expects another busy year where “a significant amount of trading” is likely to be required. Ultimately, the U.S. stocks should close the year higher on cooling inflation.

"This environment is supportive of growth stocks, and therefore supportive of the SPX. Our above-consensus 2023 SPX price target is 4200, with downside risk to ~3400 should rates rise and spreads widen,” they said in a client note.

Along these lines, they upgraded Software stocks to Neutral from Underweight due to: 1) no longer overbought conditions, 2) expectations that the macro will start favoring high-growth firms.

Similarly, WF analysts led by Harvey slashed the rating on Tech Hardware to Underweight from Neutral, citing premium valuation, overbought technicals, and anticipated consumer trends.

Finally, they are also more cautious on Food, Beverage, and Tobacco stocks as they cut the rating to Neutral from Overweight, due to “potential margin pressure, a not-too-hard landing, a premium valuation, and relative outperformance.”

Elsewhere, the analysts are in favor of mid-cap growth while expecting uber-caps to lag due to validation and the fact they are yet to enter into an oversold territory.

“We believe mid-cap growth is the sweet spot for risk/reward across style and cap, as (1) valuation (15.3x 2023E) is at a discount to the SPX's 17.2x; (2) expectations have been managed down aggressively, with MIDG estimates revised down more than those for the SPX and mid-cap value (MIDV); (3) the macro environment favors growth; and (4) it is technically oversold but bouncing (see p. 7 for stock ideas).”

Net-net, Wells Fargo is telling clients to remain defensively positioned as far as styles are concerned. The focus should be on low-volatility, high-quality, and high-momentum stocks.