A significant Wall Street strategist has suggested that materials stocks might be on the verge of a substantial rally. Savita Subramanian, an equity and quantitative strategist at Bank of America, has upgraded the materials sector to overweight from market weight. In a note to clients, Subramanian indicated that this sector exhibits the highest correlation to Chinese equities and is likely to benefit the most from a series of economic stimulus measures in China.
This theory was evidenced during the previous week’s rally in Chinese stocks. The Materials Select Sector SPDR Fund (XLB) saw a 3% increase last week, although it experienced a slight decline on Monday and Tuesday. The fund’s principal holdings include Linde, Sherwin-Williams, and Freeport-McMoRan. Since the rally in Chinese stocks commenced, this materials fund has been on an upward trend.
The materials sector, which comprises entities ranging from mining companies to chemical and cardboard manufacturers, could also gain from the Federal Reserve’s more accommodative monetary policy, characterized by lower interest rates, according to Bank of America. Subramanian noted, “Materials saw the biggest earnings swoon of all sectors since hiking began, suggesting the biggest potential upside in earnings on an accelerating profits cycle amid Fed cuts.”
Bank of America is not alone in its optimistic outlook for the materials sector in light of changes in China. JC O’Hara from Roth MKM also emphasized the potential of this group earlier in the week.
