Bank of America Hartnett : le secteur des matériaux sera le prochain « nouveau favori du marché haussier »

Bank of America Securities’ chief investment strategist Michael Hartnett highlighted the materials sector in his latest report, calling it the next “bull market darling”.

Hartnett pointed 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.

The materials sector currently accounts for only 2% of the S&P 500 market cap, near a 30-year low, with significant valuation discount characteristics.

Meanwhile, he noted 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”

Hartnett pointed out 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 about 30%.

Hartnett noted 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 occurrence of both, Hartnett characterizes as “bubble-like war and peace overlapping stagflation”.

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

Meanwhile, although emerging markets are still in a rate-cutting cycle, the extent of rate cuts has narrowed to its smallest level since August 2023.

He further pointed 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, which is an “important signal” that the central banks are rapidly shifting to a hawkish stance to cope with the nominal economic boom.

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

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

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

The core logic behind his bullish outlook on the materials sector includes 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 analysis also provides support, with steel ETFs currently testing pre-2008 financial crisis historical highs.

AI giants’ valuations approaching historic bubble peaks

For AI-related leading assets, Hartnett issued a warning: the top ten AI stocks now account for 40% of the total market cap 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 cited 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.