BofA "U.S. Stock Market: Bearish Argument Impossible Now"...Expectations for Cyclical Stock Rally to Lead ↑

▲ U.S. stock market, semiconductors, crude oil, gold, silver, bull market/AI generated image

Although the U.S. stock market is taking a breather ahead of the Independence Day holiday, a Wall Street strategist diagnosed that opportunities are accumulating in cyclical stocks. With corporate earnings forecasts stronger than expected at the beginning of the year, industrial goods, energy, materials, and semiconductors are analyzed to take market leadership in the future.

Savita Subramanian, Head of U.S. Equity and Quantitative Strategy at Bank of America Securities, said in an interview with CNBC on July 2 (local time) regarding the U.S. stock market, “It's difficult to make a bearish argument in the U.S. right now.” She assessed that the U.S. economy is moving at a “very healthy pace” and that corporate capital expenditures (CAPEX) are increasing in earnest. Prior to the open, Dow futures indicated a rise of 155 points, S&P futures over 7 points, and Nasdaq futures about 12 points.

Subramanian saw some burden on the index itself. She explained that the index's movement appeared somewhat unstable, stating that it was a period where supply was entering the market and demand was taking a temporary break. However, she emphasized that the core pillars of the market remain the economy and corporate earnings. She stated, “Corporate earnings are really strong this year,” and that while they started with a forecast of 15% earnings growth at the beginning of the year, they are now tracking approximately 20% growth.

Subramanian's judgment is that the focus of investment strategy should shift from the overall overvalued index to groups of companies sensitive to Gross Domestic Product (GDP). She interpreted that if the Federal Reserve is concerned about the possibility of overheating rather than a recession, it means the economic strength is still robust. She added, “We are in a great nominal GDP environment,” and that sectors directly benefiting from economic expansion, such as industrials, energy, and materials, are still trading cheaply.

Specific promising areas suggested include machinery, engineering, construction, crude oil, and metals. Subramanian explained that if the manufacturing CAPEX boom continues, demand for parts, energy, and raw materials to build facilities and move goods will also increase. Regarding semiconductors, she expressed skepticism about the recent sell-off, stating, “It makes sense that semiconductors have been strong this year.” Her assessment is that artificial intelligence and increased manufacturing investment continue to support semiconductor demand.

The bullish argument for the energy sector also distanced itself from simple geopolitical risk aversion. Subramanian said that large oil companies had already started outperforming the market even before the war, adding, “We are in a power bottleneck.” She explained that crude oil and gas are needed to operate new infrastructure and manufacturing facilities, and energy companies, unlike in the past, are adhering to capital discipline. The next opportunity for the U.S. stock market is increasingly likely to come from sectors directly riding the real economic expansion and capital expenditure cycle, rather than from follow-up buying across the entire index.

[Article Key Summary]

-Savita Subramanian assessed that it is difficult to make a bearish argument for the U.S. stock market due to the strong U.S. economy and corporate earnings.

-The corporate earnings growth forecast for this year has risen from 15% at the beginning of the year to approximately 20%, and GDP-sensitive stocks were presented as key investment targets.

-Industrials, energy, materials, and semiconductors were identified as sectors that could benefit from expanded manufacturing capital expenditures and power bottlenecks.

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