BofA Hartnett: The materials sector will be the next "bull market favorite"

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Michael Hartnett, Chief Investment Strategist at BofA Securities, highlighted the materials sector in his latest report, calling it the next "bull market favorite".

In his latest report, Hartnett pointed out that the global geopolitics-driven scramble for resources, AI capital expenditure boom, surging defense spending, and the U.S. housing shortage are together propelling the materials sector toward a long-term upward inflection point.

The materials sector currently accounts for only 2% of the S&P 500 market capitalization, near a 30-year low, making it notably undervalued.

At the same time, he noted that the annualized increase of U.S. stocks has reached 20%, and that of gold has reached 30%. Historically, this combination has only appeared during periods of war, peace, bubbles, and stagflation, often signaling the accumulation of deep structural risks.

Stock-Gold Bull Markets Indicate "Bubble & Stagflation" Coexistence

Hartnett pointed out that U.S. stocks are now on track for their fourth consecutive year of double-digit gains, with an annualized return of about 20%; gold, over the same period, has an annualized gain of about 30%, also marking its fourth consecutive year of double-digit increases.

He noted that four consecutive years of double-digit gains in U.S. stocks have historically only occurred during wartime (1942–1945), peacetime (1949–1952), and the bubble era (1995–1999);

As for gold, four consecutive years of double-digit gains have only occurred during stagflation (1971–1974 and 1977–1980).

The simultaneous occurrence of both, Hartnett characterizes as "bubble-like war and peace overlayed with stagflation".

At the macro level, Hartnett observed that since November 2023, the pace of rate hikes by developed market central banks has, for the first time, surpassed the pace of rate cuts.

Meanwhile, emerging markets are still in a rate-cutting cycle, but the excess of rate cuts over hikes has narrowed to the smallest level since August 2023.

He further pointed out that the NYSE Composite Index—which he regards as the best barometer of Wall Street—faces technical pressure from a "double-top" formation in the coming weeks, which he sees as an "important signal" that central banks are quickly switching to hawkish in response to nominal economic boom.

"Bubble Barbell" Strategy: Materials Are the Best Pairing

Hartnett proposes a "bubble barbell" strategic framework, i.e., simultaneously going long on "hot assets" and "disgraced assets": the former referring to current AI and semiconductors, the latter meaning out-of-favor, heavily oversold, and cyclically sensitive assets likely to benefit from the final bubble wave in nominal GDP.

Within this framework, Hartnett believes the materials sector is the optimal pairing with the semiconductor frenzy. Consumption, China, and U.K. assets also show pairing potential, but bonds, which have been neglected by the market, do not fit this logic.

The core logic behind his bullish view on the materials sector encompasses multiple dimensions:

Intensified global competition for natural resources amid geopolitical shifts;AI infrastructure capital expenditure reaching $750 billion and still climbing;Global defense spending approaching $3 trillion;U.S. housing shortage exceeding 4 million units;As well as the "implicit appreciation" of the Chinese yuan exchange rate.

Technical analysis also provides support, as the Steel ETF is currently testing its historic highs set prior to the 2008 financial crisis.

AI Giants’ Valuations Near Historical Bubble Peaks

For top AI assets, Hartnett issued a warning: The top 10 AI stocks now account for 40% of the total S&P 500 market capitalization, with concentration near the levels seen during the "Nifty Fifty" in the 1970s, the Japanese stock market bubble in the 1980s, and the internet bubble peak of the 1990s.

However, it has not yet reached the extreme levels of the railroad bubble in the 1880s.

As to how this boom or bubble might end, Hartnett cited history, noting that rapidly rising bond yields are the key trigger:

A 200 basis point increase in U.S. Treasury yields ended the "Nifty Fifty" bubble;A 230 basis point rise in Japanese government bond yields burst the Japan bubble;A 260 basis point increase in U.S. Treasury yields in 1999 put an end to the internet bubble.

Risk DisclaimerThe market entails risks, and investment must be cautious. This article does not constitute personal investment advice and does not consider the individual investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinion, viewpoint, or conclusion in this article is appropriate to their own situation. Investing accordingly is at your own risk. ```