Michael Hartnett, Chief Investment Strategist at BofA Securities, has highlighted the materials sector in a recent report, naming it the next "favorite" for the bull market. In his latest analysis, Hartnett points out that a combination of global geopolitical competition for resources, the AI capital expenditure boom, surging defense spending, and the US housing shortage is collectively driving the materials sector toward a long-term upward inflection point. Currently, the materials sector represents only 2% of the S&P 500's market value, nearing a 30-year low, indicating a significant valuation gap.
Simultaneously, he notes that US stocks have achieved an annualized gain of 20%, while gold has seen an annualized increase of 30%. Historically, this combination has only occurred during periods of war, peace, bubbles, and stagflation, often signaling the buildup of deep structural risks. The dual bull markets in stocks and gold point to a coexistence of "bubble and stagflation." Hartnett observes that US stocks are on track for a fourth consecutive year of double-digit gains, with an annualized return of about 20%; gold has similarly achieved an annualized gain of approximately 30% over the same period, also marking its fourth straight year of double-digit growth. Hartnett notes that US stocks experiencing four consecutive years of double-digit growth has historically only occurred during wartime (1942-1945), peacetime (1949-1952), and the bubble era (1995-1999). Gold's four-year streak of double-digit gains 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 combined with stagflation." On a macro level, Hartnett observes that, for the first time since November 2023, developed market central banks have increased interest rates more than they have cut them. Meanwhile, although emerging markets remain in a rate-cutting cycle, the margin by which rate cuts exceed hikes has narrowed to its smallest level since August 2023. He further points out that the NYSE Composite Index, which he considers the best barometer of Wall Street, faces technical pressure from a potential "double top" pattern in the coming weeks. He views this as an "important signal" that central banks are rapidly turning hawkish to address a nominal economic boom. Hartnett proposes a "bubble barbell" strategy framework, which involves simultaneously going long on "frenzied assets" and "humiliated assets." The former corresponds to current AI and chip sectors, while the latter refers to cyclical assets that are out of favor, oversold, and poised to benefit from the final wave of a nominal GDP bubble. Within this framework, Hartnett believes the materials sector is the optimal pairing choice alongside the chip frenzy. Consumer sectors, Chinese assets, and UK assets also possess pairing potential; however, bonds, which have fallen out of market favor, do not fit this logic. The core rationale driving his bullish view on the materials sector spans multiple dimensions:
Intensified global geopolitical competition for natural resources; AI infrastructure capital expenditure reaching $750 billion and continuing to climb; Global defense spending approaching $3 trillion; A US housing shortage exceeding 4 million units; And the "implicit appreciation" of the Chinese yuan.
Technical analysis also provides supporting evidence, with the Steel ETF currently testing historical highs seen before the 2008 financial crisis.
Hartnett issues a warning regarding top AI-related assets: the top ten AI stocks now account for 40% of the S&P 500's total market value. This concentration level is nearing the peaks seen during the "Nifty Fifty" era of the 1970s, the Japanese stock market bubble of the 1980s, and the dot-com bubble of the 1990s.
However, it has not yet reached the extreme levels of the 1880s railway stock bubble. Regarding how this current boom or bubble might end, Hartnett cites historical patterns, indicating that a sharp rise in bond yields is a key triggering factor:
A 200-basis-point increase in US Treasury yields ended the "Nifty Fifty" bubble; A 230-basis-point rise in Japanese government bond yields burst the Japanese bubble; A 260-basis-point climb in US Treasury yields in 1999 brought the dot-com bubble to a close.
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