Materials Sector Rating: Neutral
The Materials sector is sensitive to fluctuations in the global economy, the U.S. dollar, and inflationary pressures. Accommodative monetary and fiscal policies are underpinning global economic growth and pricing power. However, the U.S. dollar has trended higher recently, which historically is a headwind for the sector.
The sector’s cyclical-value characteristics—which tend to do well amid improving global growth and strong demand for industrial metals—have been a tailwind. Although metal prices remain elevated amid strong demand coupled with supply constraints, economic growth is at risk of easing amid peaking U.S. growth and weaker demand in China. The Biden administration’s clean energy and infrastructure initiatives could sustain the boom for industrial metals and materials—though tougher regulations are a risk. And demand for chemicals (the largest industry in the sector) may continue to increase as oil demand improves—but oil rig counts have been slow to rise. Furthermore, high energy prices are a headwind to chemical production profitability. Finally, the recent rise in agricultural commodity prices may have run its course.
Positives for the sector:
- Improving global economic growth has supported industrial metals and chemical prices—though appears to be moderating somewhat amid slowing economic growth in China
- Cyclical-value sector characteristics tend to be favored in the expansion phase of the business cycle
- U.S. clean-energy and infrastructure spending could spur demand for industrial materials.
- Recent sector performance weakness has improved valuations
Negatives for the sector:
- The slow recovery in the oil rig count is a headwind for oil-fracking chemicals, and high energy prices have raised the cost of chemical production.
- Momentum has weakened recently
- Significant supply chain bottlenecks may be constraining economic growth
Risks for the sector:
- An increase in global COVID-19 cases
- Potential stringent environmental regulations
- Strong rally in the U.S. dollar and/or weaker than expected economic growth
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market*
- Neutral: no current view on likely relative performance
* As represented by the S&P 500 index
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