Bank of America Hartnett: El sector de materiales será el próximo "favorito del mercado alcista"

Bank of America Securities’ Chief Investment Strategist Michael Hartnett highlights the materials sector in his latest report, calling it the next “bull market favorite.”

Hartnett points out in his latest report that global geopolitical competition for resources, the AI capital expenditure boom, surging defense spending, and the US housing shortage are collectively driving the materials sector into a long-term upward inflection point.

Currently, the materials sector accounts for only 2% of the S&P 500 market capitalization, near a 30-year low, with significant value valuation characteristics.

Meanwhile, he notes that US stocks have an annualized return of 20%, and gold an annualized return of 30%. This combination has only appeared in history during periods of war, peace, bubbles, and stagflation, often signaling the accumulation of deep structural risks.

Stock and gold double bull points to “bubble stagflation coexistence”

Hartnett states that US stocks are on track for a fourth consecutive year of double-digit gains, with an annualized return of about 20%; gold has also seen a fourth consecutive year of double-digit annualized gains at around 30%.

He points out that, the four-year consecutive double-digit rise of US stocks has only occurred historically during wartime (1942-1945), peacetime (1949-1952), and bubble periods (1995-1999);

The four-year consecutive double-digit rise of gold has only been seen during stagflation periods (1971-1974 and 1977-1980).

The simultaneous appearance of both, Hartnett characterizes as “bubble-like war and peace overlapping stagflation.”

On the macro level, Hartnett notes that since November 2023, the pace of interest rate hikes by developed market central banks has first exceeded the pace of rate cuts.

Meanwhile, emerging markets, although still in a rate-cutting cycle, have seen the magnitude of rate cuts narrow to the smallest level since August 2023.

He further points out that the NYSE Composite Index (which he regards as Wall Street’s best barometer) faces technical resistance from a “double top” pattern in the coming weeks, signaling an “important sign” that central banks are rapidly shifting to hawkish policies to cope with nominal economic prosperity.

“Bubble Bell” strategy, materials as the optimal pairing choice

Hartnett proposes a “bubble bell” strategy framework, which involves going long on both “frenzied assets” and “disgraced assets,” with the former corresponding to current AI and chip stocks, and the latter referring to out-of-favor, oversold, and cyclically driven assets that will ultimately be boosted by the nominal GDP bubble wave.

Under this framework, Hartnett considers the materials sector as the best pairing with chip frenzy, with consumer, Chinese, and UK assets also having pairing potential; bonds, which are neglected by the market, do not fit this logic.

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

• The intensification of global geopolitical competition over natural resources;

• AI infrastructure capital expenditure reaching $750 billion and continuing to rise;

• Global defense spending approaching $3 trillion;

• The US housing gap exceeding 4 million units;

• And the “hidden appreciation” of the RMB exchange rate.

Technical evidence also supports this, as steel ETFs are currently testing pre-2008 financial crisis historical highs.

AI giants’ valuations approaching historic bubble peaks

For AI-related leading assets, Hartnett issues a warning: the top ten AI stocks now account for 40% of the total market capitalization of the S&P 500, with concentration levels approaching those of the “Beautiful 50” of the 1970s, the Japanese stock market of the 1980s, and the internet bubble peak of the 1990s.

However, they have not yet reached the extreme levels of the railroad bubble of the 1880s.

Regarding how this boom or bubble might end, Hartnett cites historical patterns, indicating that a sharp rise in bond yields is a key trigger:

• The US Treasury yield rising 200 basis points ended the “Beautiful 50” bubble;

• The Japanese government bond yield rising 230 basis points burst the Japanese bubble;

• The US Treasury yield rising 260 basis points in 1999 marked the end of the internet bubble.