Bank of America's Hartnett: The material sector will be the next "darling of the bull market"

In his latest report, Bank of America Securities Chief Investment Strategist Michael Hartnett named the materials sector as the next "darling of the bull market". Hartnett pointed out in the latest report that global geopolitical competition for resources, the AI capital spending boom, the surge in defense spending, and the housing shortages in the United States are all driving the materials sector into a long-term upward inflection point. The materials sector currently accounts for only 2% of the market value of the S&P 500, close to a 30-year low, with significant undervaluation characteristics. At the same time, he pointed out that U.S. stocks have had an annualized return of 20%, and gold has had an annualized return of 30%. This combination has historically only appeared during times of war, peace, bubbles, and stagflation, often signaling the accumulation of deep structural risks. Stocks and gold point to both a "bubble stagflation" scenario Hartnett pointed out that U.S. stocks are on track for double-digit gains for the fourth consecutive year, with an annualized return of around 20%; gold has also seen double-digit gains for the fourth consecutive year, with an annualized return of around 30%. Hartnett noted that U.S. stocks have seen double-digit gains for four consecutive years in the past only during times of war (1942-1945), peace (1949-1952), and the bubble era (1995-1999); while gold has seen double-digit gains for four consecutive years only during stagflation periods (1971-1974 and 1977-1980). With both occurring simultaneously, Hartnett characterized it as a "bubble-like combination of war and peace overlaid with stagflation". At the macro level, Hartnett noted that since November 2023, central banks in developed markets have raised interest rates at a pace exceeding that of rate cuts for the first time. Meanwhile, although emerging markets are still in a dominant rate-cutting cycle, the extent of rate cuts exceeding rate hikes has narrowed to its smallest level since August 2023. He further pointed out that the NYSE Composite Index (which he views as Wall Street's best barometer) is facing technical pressure of a "double top" formation in the coming weeks, which he sees as an "important signal" of central banks swiftly turning hawkish to address the nominal economic boom. The "bubble barbell" strategy, with materials being the optimal pairing choice Hartnett proposed the "bubble barbell" strategy framework, which involves simultaneously being bullish on "euphoric assets" and "humiliated assets", with the former referring to current AI and chip investments, and the latter indicating out-of-favor, oversold, and cyclical assets that will be boosted by the final wave of nominal GDP bubble. Within this framework, Hartnett believes the materials sector is the best target to pair with the chip frenzy, with consumer, Chinese, and UK assets also possessing pairing potential; while bonds shunned by the market do not fit into the above logic. The core logic driving his bullish view on the materials sector covers multiple dimensions: Intensified competition among countries for natural resources in the global geopolitical landscape; AI infrastructure capital spending reaching $750 billion and continuing to rise; Global defense spending approaching $3 trillion; The U.S. facing a housing shortage of over 4 million units; And the "implicit appreciation" of the RMB exchange rate. Technically, steel ETFs are currently testing historical highs before the 2008 financial crisis. Valuations of AI giants approaching historical bubble peaks Regarding top AI assets, Hartnett issued a warning: the top ten AI targets currently account for 40% of the total market value of the S&P 500, a level of concentration approaching that of the "Nifty Fifty" of the 1970s, the Japanese stock market of the 1980s, and the peak of the Internet bubble of the 1990s. These levels have not yet reached the extreme of the railway stock bubble in the 1880s. Regarding how this boom or bubble will end, Hartnett cited historical rules and pointed out that a sharp rise in bond yields is a key trigger: A 200 basis point rise in U.S. Treasury yields ended the "Nifty Fifty" bubble; A 230 basis point rise in Japanese government bond yields burst the Japanese bubble; And a 260 basis point rise in U.S. Treasury yields in 1999 marked the end of the Internet bubble. This article is reprinted from Wall Street, GMTEight Editor: Chen Yufeng.