Bank of America Merrill Lynch upgrades the materials sector rating, expecting rate cuts to drive profit rebound

According to the Zhitong Finance and Economics APP, Bank of America strategists are optimistic about the materials sector of the U.S. stock market, in part because they expect corporate earnings to rebound after the Federal Reserve began cutting interest rates in September.

Stock and quantitative strategists at Bank of America's global research department stated in a report on Tuesday: "We are upgrading the materials sector to 'hold' as the Federal Reserve appears to be entering a phase of 'profit acceleration growth' during the rate-cutting phase." They also emphasized the recent stimulus plan announced by the Chinese government, with the materials sector being the most correlated sector with the MSCI China Index among the 11 sectors of the S&P 500 Index.

The Federal Reserve started lowering benchmark interest rates last month, having previously raised rates significantly to combat high inflation, which has now significantly declined from its peak in 2022.

"Since the Fed raised rates, the materials sector has seen the largest decline in earnings among all sectors, indicating that with the Fed cutting rates and profit acceleration growth, this sector has the greatest potential for earnings upside," the Bank of America strategists said. Their report also includes the chart below, showing the earnings performance of the S&P 500 Index and its 11 sectors in the past 12 months compared to 2021.

When overweighting the materials sector, Bank of America strategists also mentioned the "underinvestment in manufacturing over the past decade," believing that areas such as mining and equipment replacement may drive higher returns. They pointed out that in the "traditional" capital expenditure cycle and the "ambitious decarbonization goals," metals, mining, and commodities typically receive support. According to FactSet data, the materials sector of the S&P 500 rose by 9.2% in the third quarter, outperforming the 5.5% increase in the S&P 500 Index during the same period, bringing the year-to-date increase in the materials sector to 12.6% as of the end of September.

A report from last Friday pointed out that as investors approached the end of September, cyclical sectors in the U.S. stock market outperformed the technology sector over the past three months. According to FactSet data, information technology is the largest sector in the S&P 500 Index, accounting for as much as 32%.

Meanwhile, Bank of America's report noted that the trading price of the S&P 500 materials sector is still below its historical premium. The chart below shows the sector's price-to-earnings ratio relative to the S&P 500 Index performance.

![3.png](https://img.zhitongcaijing.com/image/20241002/1727823444570728.png? On Tuesday this week, the U.S. stock market kicked off trading for the fourth quarter. The S&P 500 index fell by 0.93%, the Dow Jones Industrial Average dropped by 0.41%, and the tech-heavy Nasdaq Composite Index declined by 1.53%. The materials sector of the S&P 500 fell by 0.32%, while a significant 2.66% drop in the information technology sector exerted heavy pressure on the major U.S. stock indices