Materials Sector Rating: Marketperform

What is the materials sector?

The materials sector includes companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including steel producers.

Materials sector overview

The commodity price declines seen over the past couple of years may be ending, with global monetary policies helping to arrest the fall. However, rapid gains in commodity prices seems unlikely at this point, and a tightening Fed gives us caution.

Market outlook for the materials sector

We believe that the sharp commodity price decline seen over the past couple of years has ended, with global stimulative monetary policies helping to arrest the fall. We don’t think investors should bail out of the materials sector following the recent fall in the price of iron as we’ve started to see a modest rebound. Nor should they load up on hopes of a sustained rebound in commodity prices, as we don’t think that appears very likely with global economic growth still modest, at best.

A generally positive economic picture in the U.S., as well as a slightly improving European economy, are potential positives for the materials sector. Additionally, some indebted governments have scaled back their austerity plans and are focusing more closely on generating economic growth. This could provide a bit of a tailwind behind the materials sector.

However, there is uncertainty surrounding both U.S. monetary policy and global economic growth. European economic growth has improved as mentioned above, but remains modest, and they are still dealing with some structural problems. Chinese economic growth has slowed compared to the past several years, though it has stabilized recently. Also, a renewed strengthening of the U.S. dollar could hurt the sector, although that could be mitigated somewhat by hopes for better U.S. economic growth. For now, we’re holding to our marketperform rating.

Factors that may affect the materials sector

Positive factors for the materials sector include:

  • Increased demand: Developing countries continue to need more raw materials to support their infrastructure building.
  • Accommodative monetary policy: Central banks in the developed world are now largely in easing mode, with the notable exception of the Fed, which should help to support economic activity and the materials sector.
  • Reduction in austerity programs: Some fiscal restraint measures seem to be easing, which could help to stimulate growth. 

Negative factors for the materials sector include:

  • Reduction in demand from China: Chinese demand for processed commodities might be slowing as technological advances and a build-out of production facilities allow the country to produce more of its own materials. China recently transitioned from being a net importer to a net exporter of steel.
  • Larger inventories in China: Reports of large supplies could dampen hopes for a sharp rebound, as it could take time to work through those stockpiles. 
  • Increased labor costs: Wage costs are rising in the materials sector, as we’ve seen skilled-labor shortages in certain segments of the market.

Clients can see our top-rated stocks in the materials sector.

Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare.

Schwab Sector Views

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