BofA: Materials Sector Becomes Main Character of New Bull Market, Commodities Performance Bright

Overview

This report is released by BofA Global Research, focusing on global major asset fund flows and market structural changes in early May 2026. The core view is that in the context of global geopolitical resource competition, surging AI capital expenditure, and US housing shortages, the long-underestimated materials sector (accounting for only 2% of S&P 500 weight) is becoming the main character of the new bull market. Through the 'Hubris and Humiliation' strategy framework, the report suggests investors configure cyclical assets like commodities while holding hot tech stocks such as AI to hedge risks. Additionally, the report details fund flow nuances in recent stock, bond, and commodity markets and looks at the potential impact of the 2026 World Cup on the economy.

Core views

Structural inflection point for the materials sector. The report points out that the market cap weighting of the materials sector in S&P 500 is only 2%, nearing the lowest level in 30 years (Chart 2). This underweight status stands in sharp contrast to current global geopolitical struggles over natural resources, AI capital expenditure of $750 billion still growing, nearly $3 trillion global defense spending, and US housing shortage exceeding 4 million units. In this environment of 'Nominal GDP surge' (consensus forecast 5.5% growth in 2026 nominal GDP), the materials sector is expected to replicate double-digit return performance from historical periods of war, peace, or bubbles. 'Hubris and Humiliation' Barbell Strategy. BofA proposes an optimal bubble barbell strategy: one end is 'Hubris', i.e., currently sought-after AI and chip stocks (accounting for nearly 40% of S&P 500 market cap, concentration approaching historical bubble peaks); the other end is 'Humiliation', i.e., unwanted, struggling cyclical assets benefiting from the final sprint of nominal GDP, such as materials, emerging markets, China assets, and UK assets. The report warns that although tech stock momentum is strong, surging bond yields are usually a signal of bubble endings (e.g., bond yields rose sharply at the end of the Nifty Fifty in the 70s, Japan in the 80s, and Internet Bubble in the 90s). Fund flows show hedging and rotation coexisting. Weekly data shows significant inflow into cash ($136 billion) and investment-grade bonds ($16.4 billion, highest since Jan 2026), while Emerging Market Stocks (outflow $11.6 billion, with Chinese stocks outflowing for 6 consecutive weeks) and European Stocks (outflowing for 4 consecutive weeks) faced selling pressure. Notably, BofA Private Clients (assets under management $4.4 trillion) equity allocation ratio rose to 65.3% (highest since Oct 2021), cash ratio dropped to the lowest in this century (9.9%). In the past four weeks, private clients mainly bought energy, municipal bonds, and materials ETFs, while selling utilities, financials, and tech ETFs, showing clear signs of style rotation. Economic math of 2026 World Cup. There are 35 days until the opening of the 2026 US-Canada-Mexico World Cup. The report estimates this event will bring $41 billion global GDP impact, with the finals potentially consuming 7% of global internet traffic. The sports industry has become the world's 10th largest economy with annual revenue reaching $2.3 trillion, where European football club transaction value reached €11.4 trillion in the past decade, and 36% of top European league clubs are backed by private equity, venture capital, or private credit.

Analysis framework

BofA adopts an analytical framework combining 'Fund Flows + Valuation Extremes + Macro Narratives'. First, by tracking weekly fund flow data via EPFR, Lipper, etc., capturing real-time position changes of institutional and individual investors, especially private client ETF buy/sell direction as sentiment counter or confirmation indicator. Second, identifying extreme market states using historical valuation percentiles (e.g., materials sector weight in S&P, tech stock concentration), combined with 'Bull & Bear Indicator' to quantify market sentiment. Finally, linking macro narratives (e.g., AI capex, geopolitics, nominal GDP growth) with asset performance, using behavioral finance perspective of 'Hubris and Humiliation' to explain why funds rotate barbell-style between hot tech stocks and neglected commodities.

Methodology notes

• Event Trading & Behavioral Finance

  Hubris & Humiliation Barbell Strategy

  This is an allocation strategy based on extreme market sentiment. 'Hubris' refers to currently extremely crowded, high-valuation hot assets (like AI chips); 'Humiliation' refers to long-neglected, undervalued cyclical assets (like commodities). The report suggests holding both during late-stage bubbles to utilize inertial gains from hot assets and catch-up potential from cold assets, hedging against single-style collapse risks.

• Valuation methods

  Historical Percentile Analysis of Industry Market Cap Weighting

  By observing the market cap weighting of specific industries (like materials sector) in major indices (like S&P 500) and comparing with historical highs and lows over 30 years, judge whether the industry is in an extremely underweight state. Extremely low weighting often implies larger potential excess returns in the future, serving as an important reference indicator for contrarian investing.

• Quantitative / Factor / Portfolio TheoryBeta/alpha analysis

  BofA Bull & Bear Indicator

  BofA proprietary sentiment indicator, comprehensively considering factors such as stock breadth, fund flows, volatility. Higher indicator readings represent more optimistic/overheated markets. Current reading of 7.2 is neutral-high, but has not touched the 8.8 extreme sell signal line, helping investors quantify current market temperature.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Materials Sector ETF (e.g., XLB)

  Beneficiary: As a representative of 'Humiliation' assets, benefited by geopolitical resource competition, AI infrastructure demand, and housing shortage, with valuations at historical lows.

  Strengths

  Extremely low market cap weight, huge catch-up space; directly benefits from nominal GDP growth and physical demand.

  Weaknesses

  Long-term unpopular with market, low capital attention.

  Comparison

  Compared to tech stocks with 40% weight in S&P 500, materials sector has better safety margin and explosion potential.

  Risks

  Demand contraction if global economic growth falls short of expectations.

• Tech Stocks (AI Big 10)

  Benefit/Risk并存：As 'Hubris' assets, enjoy AI capex dividends, but extremely high concentration, facing valuation correction risk caused by yield rise.

  Strengths

  Strong earnings growth, dominate market trend.

  Weaknesses

  Crowded valuation, excessive trading concentration.

  Comparison

  Concentration approaches Nifty Fifty peak in 70s and Internet Bubble peak in 90s.

  Risks

  Sharp rise in bond yields could burst the bubble.

• Emerging Market Stocks (EM)

  Adversely Affected: Recent significant capital outflows, especially Chinese stocks with continuous net outflow.

  Strengths

  Relatively cheap valuation, in long-term bottom zone.

  Weaknesses

  Lack of short-term catalysts, pessimistic capital sentiment.

  Comparison

  Relative price is at historical low compared to US stocks.

  Risks

  USD strengthening, global trade friction.

Key data

• Asset Returns Year-to-Date 2026Oil +68.9%, Commodities +54.1%, Gold +8.4%, S&P 500 +7.2%Commodities significantly outperformed traditional stock and bond assets
• Materials Sector Weight in S&P 5002%Nearing 30-year low, last similar low was Sept 2000
• BofA Bull & Bear Indicator Reading7.2Risen from 6.6, signal is neutral; Sell signal trigger threshold is 8.8
• Weekly Fund Flows - CashInflow $136 billionShows investors still hold substantial liquidity
• Weekly Fund Flows - EM StocksOutflow $11.6 billionIncluding China stocks outflow $9.8 billion, continuous 6-week net outflow
• 2026 World Cup Expected GDP Impact$41 billionGlobal football fans number 5 billion, finals may occupy 7% of global internet traffic
• BofA Private Client Stock Allocation Ratio65.3%Highest since Oct 2021, cash ratio dropped to 9.9%

Impact & implications

The report believes that with nominal GDP growth and escalation of geopolitical factors, market style is spreading from pure tech growth to 'hard assets' and 'physical resources'. For investors, this means while continuing to hold some tech stocks, they should increase allocation exposure to materials, energy, and commodities to capture catch-up opportunities of 'Humiliation' assets and diversify concentration risk. Meanwhile, continuous capital outflows from European and Chinese assets reflect market concerns regarding economic growth drivers in these regions, likely to continue under pressure in the short term. Large events like the World Cup also bring short-term thematic investment opportunities for sports media, consumption, and related infrastructure fields.

Risks

• Sharp rise in bond yields may cause tech stock bubble burst.
• Weak European economic growth, unresolved energy supply issues.
• Emerging market and Chinese economic recovery below expectations, continuous capital outflows.
• Escalation of geopolitical conflict leads to further supply chain interruptions.

What to watch

• Whether BofA Bull & Bear Indicator touches 8.8 extreme sell signal.
• Whether materials sector and commodities can continue to outperform tech stocks.
• Whether China stock fund outflow trend reverses.
• Performance of consumption and media sectors related to 2026 World Cup.
• Whether US nominal GDP growth rate maintains high levels.