Wells Fargo Lowers Machinery Stock Targets on Emerging AI Funding Risks

Wells Fargo has lowered its target multiples for machinery stocks after identifying signs of credit stress in the artificial intelligence funding sector, according to a research note published Monday. The bank cautioned that its previous assumption of readily available financing for the AI-driven construction boom has been challenged by new data, introducing potential risks to future capital spending.

Cracks in AI Financing

Wells Fargo's analysts pointed to credit default swap (CDS) data tracked since September as a key indicator of potential capital expenditure (capex) risks for AI projects in 2028-2029. The bank noted that its prior analysis had focused more on physical constraints, such as equipment supply and permitting, rather than financing availability.

This concern is compounded by operational timelines. Lead times for power generation equipment have now extended beyond the typical 18-month visibility window for permits. This limits the ability to forecast project viability for the second half of 2028 and beyond, as air permits must generally be filed within 18 months of construction.

Contrasting Construction Trends

Despite the long-term financing concerns, the current data center construction market remains exceptionally strong. According to the note, September data showed a significant surge:

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• Data center construction starts rose 180% year-over-year in dollar terms.
• In terms of square footage, starts increased by 70%.
• The bank also observed a 65% increase in content per square foot, indicating higher-density projects with greater power and mechanical requirements.

This boom in data centers, however, contrasts with the broader market. Overall private non-residential construction has fallen by approximately $25 billion over the last two years, largely driven by a roughly $60 billion peak-to-trough decline in spending on semiconductor and electronics facilities.

Sector Bright Spots

The Wells Fargo note did highlight specific areas of strength. Construction rental companies are positioned to benefit from tight supply conditions and an acceleration in semiconductor onshoring. The bank projects 9.5% growth in private non-residential construction for 2027-28, supported by semiconductor capex plans showing growth above 90% in 2027.

Environmental services companies were also mentioned as a resilient segment. The top two firms in the sector hold an average market share of 91%, which has enabled them to maintain pricing power above inflation since 2018, according to the bank's analysis.