Wells Fargo cuts machinery targets on AI funding concerns

Investing.com -- Wells Fargo has reduced its target multiples for machinery stocks after identifying credit stress in the AI funding sector that emerged over the past week, according to a research note released Monday.

The bank said it previously focused on physical constraints such as machinery supply, permits, and lead times while assuming financing would remain available. That assumption proved incorrect as credit default swap data tracked since September now points to potential AI capital expenditure risks in 2028-29.

Power generation equipment lead times have extended beyond the typical 18-month permit visibility window, with channel checks showing further increases during the third quarter. Air permits generally must be filed within 18 months of construction for review, which limits visibility for the second half of 2028 and beyond.

Data center construction starts remained strong in September, rising 180% year-over-year in dollar terms and 70% in square footage. The bank noted a 65% increase in content per square foot, reflecting higher density and more power and mechanical requirements.

The bank's 2027 forecast calls for 9.5% growth in private non-residential construction, which includes an assumption of 35% growth in data center spending. Private non-residential construction has declined by approximately $25 billion over the past two years despite robust data center growth, driven by a roughly $60 billion peak-to-trough decline in semiconductor and electronics spending.

Wells Fargo said construction rental companies stand to benefit from tight supply conditions and accelerating semiconductor onshoring. The bank estimates 9.5% private non-residential construction growth in 2027-28 compared with negative 1.5% in 2026, based on semiconductor capital expenditure plans showing growth above 90% in 2027. Rental company margins turned positive in the third quarter.

The bank also highlighted environmental services companies, noting the top two firms hold 91% market share on average, which has supported pricing above inflation since 2018.

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