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

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Although the U.S. stock market has entered a breather ahead of the Independence Day holiday, Wall Street strategists have diagnosed that opportunities are accumulating in cyclical stocks. Amid stronger corporate earnings forecasts than expected at the beginning of the year, industrial goods, energy, materials, and semiconductors could take the lead in the market going forward.

Savita Subramanian, Head of U.S. Equity and Quantitative Strategy at Bank of America Securities, stated in an interview with CNBC on July 2 (local time) regarding the U.S. stock market, "It's difficult to make a bearish case for 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. Pre-market, Dow futures indicated a rise of 155 points, S&P futures more than 7 points, and Nasdaq futures approximately 12 points.

Subramanian noted that the index itself carries some burden. She explained that the index's movement appears somewhat unstable, describing it as a period where supply enters the market and demand takes a brief pause. However, she emphasized that the core pillars of the market are still the economy and corporate earnings. She stated, "Corporate earnings are really strong this year," noting that while they started with an expected 15% earnings growth rate at the beginning of the year, they are now tracking around 20% growth.

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

Specific promising areas mentioned include machinery, engineering, construction, crude oil, and metals. Subramanian explained that if the manufacturing capital expenditure boom continues, demand for parts, energy, and raw materials to build facilities and move goods will increase. Regarding semiconductors, she also stated, "It makes sense that semiconductors have been strong this year," expressing disagreement with the recent sell-off. Her judgment is that artificial intelligence and increased manufacturing investment will continue to support semiconductor demand.

The bullish argument for the energy sector also distanced itself from simple geopolitical risk aversion. Subramanian stated that major oil companies had already begun to outperform the market even before the war, adding, "We are in a power bottleneck." She explained that crude oil and natural gas are necessary to operate new infrastructure and manufacturing facilities, and unlike in the past, energy companies are also maintaining capital discipline. The next opportunity in 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 a broad index rally.

[Article Key Summary]

-Savita Subramanian assessed that it is difficult to make a bearish case 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.

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

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