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, global economic growth remains tepid and a strong U.S. dollar could hurt exports and earnings.

Market outlook for the materials sector

We believe that the sharp commodity price decline seen over the past couple of years is ending, with global stimulative monetary policies helping to arrest the fall. We don't think investors should bail out of the material sector at this point, as the prospects appear to be improving.

A continued mostly accommodative Federal Reserve and 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 global economic growth. In our view, the European economy is tepid at best and risks have risen as several crucial elections are on the horizon. Chinese economic growth has slowed compared to the past several years, although it has stabilized of late. Also, U.S. dollar strength could hurt the sector, although that could be mitigated somewhat by the reason for a stronger dollar, which appears to us to be largely due to hope 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.
  • Stronger dollar: A continued strengthening of the U.S. dollar could hurt exports and dent U.S. industrial company profitability.

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.

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