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Bank of America believes the materials sector could emerge as one of the next major beneficiaries of several powerful global trends, despite currently representing only around 2% of the S&P 500’s total market value, close to its smallest weighting in three decades.
According to BofA chief strategist Michael Hartnett, the sector is “set to join new bulls on the block,” supported by rising geopolitical competition for natural resources, rapidly expanding artificial intelligence investment, higher global defense spending, a persistent shortage of housing in the United States, and gradual strength in China’s renminbi.
Hartnett pointed to what the bank estimates as a $750 billion and growing AI capital expenditure cycle, combined with global military spending approaching $3 trillion and a U.S. housing deficit exceeding four million homes.
He also described materials stocks as fitting into Bank of America’s “hubris and humiliation” investment framework, which combines positions in high-growth AI and semiconductor companies with overlooked cyclical sectors that could benefit from the later stages of nominal economic expansion.
Materials stocks fall into what Hartnett described as the “humiliation” category, alongside consumer-related shares, Chinese assets and U.K. equities, which he called “all unloved potential pairs with chip mania; but humiliated bonds won’t work.”
More broadly, Bank of America sees commodities, emerging markets, technology shares and small- and mid-cap companies as potential outperformers during 2026.
The bank believes commodities, emerging markets and smaller companies are entering longer-term bullish cycles, while U.S. nominal GDP is projected to rise sharply between 2020 and 2027.
Consensus forecasts currently point to 5.5% U.S. economic growth this year, while earnings per share for companies in the S&P 500 are expected to increase by 20%.
Hartnett also noted that developed market central banks are now raising interest rates more aggressively than they are cutting them for the first time since November 2023.
He suggested this shift could contribute to a potential double-top formation in the NYSE index in the coming weeks, which Bank of America views as its preferred gauge of Wall Street sentiment, as policymakers attempt to respond to accelerating nominal economic growth.
Recent fund flow data showed investors moved heavily toward defensive assets over the past week.
Money market funds attracted $136 billion, marking the largest weekly inflow since January, while bond funds received $25.9 billion and extended their streak of weekly inflows to 54 consecutive weeks.
Equity funds attracted a comparatively modest $2.6 billion.
Emerging market equities recorded outflows of $11.6 billion, the largest withdrawal since January, while China-focused funds posted a sixth straight week of outflows totaling $9.8 billion.
Over the past six weeks, total outflows from Chinese equities have reached $47.5 billion.
European equity funds also remained under pressure, with four consecutive weeks of outflows totaling $11.3 billion.
In contrast, U.S. equity funds continued to attract capital, recording a sixth straight week of inflows totaling $9.3 billion.
Consumer-focused funds experienced their largest withdrawals since December, with investors pulling $1.1 billion from the sector.
Meanwhile, the Bank of America Bull & Bear Indicator rose sharply to 7.2 from 6.6. Although the reading remains in neutral territory, it is moving closer to the bank’s 8.0 threshold that typically signals a sell indicator.