A leading Wall Street strategist recently endorsed the notion that materials stocks might be at the outset of a significant rally. Savita Subramanian, an equity and quantitative strategist at Bank of America, upgraded the materials sector from market weight to overweight. In a note to clients, Subramanian emphasized that this sector exhibits the highest correlation to Chinese equities and is likely to benefit most from China’s economic stimulus initiatives. This perspective was evident in last week’s surge in Chinese stocks. Despite a slight decrease on Monday and Tuesday, the Materials Select Sector SPDR Fund (XLB) increased by 3% last week. Major holdings of the fund include Linde, Sherwin-Williams, and Freeport-McMoRan.
According to Bank of America, the range of companies within the materials sector—from mining firms to chemical producers and cardboard manufacturers—could also gain from the Federal Reserve’s more lenient monetary policy, which includes lowering interest rates. Subramanian noted, “Materials saw the biggest earnings decline among all sectors since the rate hikes began, suggesting considerable potential for earnings growth during an accelerating profits cycle amid Fed cuts.”
Bank of America is not alone in its optimistic outlook on materials stocks in light of China’s changing economic stance. Earlier in the week, JC O’Hara of Roth MKM also highlighted the promising opportunities in this sector.
