Investing.com -- Wells Fargo analyst Christopher Harvey said in a note Wednesday that he believes the recent selloff in mega-cap tech stocks may be nearing its end, citing a combination of factors that could ease selling pressure and improve market sentiment.
The analyst says that passive index fund rebalancing flows have exacerbated the sell-off, which required trimming exposure to the largest tech names.
“Russell will implement weight caps to the top six issuers in the R1000 Growth Index: AAPL, MSFT, NVDA, AMZN, META (NASDAQ:META), and GOOG/L. Our trading desk estimates ~$6.7B for sale across the group by passive indexers,” the Wells Fargo (NYSE:WFC) analyst wrote.
However, this rebalancing is set to conclude on Friday, which could remove a key source of selling pressure. “We expect the event to end the overhang,” the bank added.
While the market has been dealing with uncertainty, Wells Fargo expects the tone to improve due to increasing clarity on macroeconomic factors.
“Expect a relatively uneventful day for stocks but the tone to improve from: (1) having more certainty, which typically helps; and (2) resolution (on Friday) of the overhang from mega-cap downsizing in the R1000 Growth Index,” wrote Harvey.
Additionally, some AI-related growth stocks, which had been heavily sold off during the broader market correction, are now approaching more reasonable valuations, according to the bank.
“Amid the current correction in the Nasdaq, former leaders have been hit particularly hard as the Momentum factor has unwound. However, we note that we are now nearing a market multiple for a basket of secular growth stories with AI exposure,” Wells Fargo noted.