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Investing.com -- In a note Thursday, Wells Fargo analysts flagged a narrow rally breadth as a potential risk for the S&P 500, despite the index’s recent rebound.
The S&P 500 "turned higher on April 9 when the administration announced a 90-day pause on reciprocal tariffs."
However, Wells Fargo (NYSE:WFC) states that "the breadth of this rally leaves some question marks as less than 50% of stocks in the index are above their 200-day moving average."
From a shorter-term perspective, they note that just 56% of stocks are above their 20-day MA.
These indicators are said to suggest that "the number of companies participating in the rally is not strong."
Wells Fargo explained that its overall approach to the equity market emphasizes patience and utilizing pullbacks to add exposure to sectors with attractive long-term prospects.
They favor a dollar-cost-averaging approach. Given that the S&P 500 is trading at or slightly above their year-end 2025 target, they advise investors to review sector exposures and adjust them towards favorable weightings in the Energy, Information Technology, Communication Services, Financials, and Utilities sectors.
The analysts favor these sectors due to their "quality and growth-oriented attributes," including "solid balance sheets, robust cash flows, and dependable earnings streams."
These sectors are also said to offer sensitivity to an "eventual modest upswing in the economy that we believe will start late this year and in 2026."
Beyond this year, Wells Fargo projects the S&P 500 to trade to the "6,400 – 6,600 level by year-end 2026."
Wells Fargo believes "one can make a rational argument that a meaningful underlying catalyst for the rally in stocks has been the anticipation that some trade deals will be completed in short order and tariff tensions might ease further."
However, they find it "overly optimistic" to expect quick agreements with China or the European Union. They anticipate "more trade uncertainty and downside volatility to create further opportunities to increase equity exposures in the near to intermediate term."
