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Materials Sector Rating: Marketperform

What is the materials sector?

It includes companies that make or process chemicals, construction materials, glass, paper, forest products, packaging products, as well as metals, minerals and mining companies.

The Materials sector has been sensitive to fluctuations in the global economy, as well as concerns about the U.S.-China trading relationship and the COVID-19 pandemic. Accommodative monetary and fiscal policies have begun to improve the prospects for global economic growth. This has allowed the U.S. dollar to trend lower which historically provides a strong tailwind for the sector. In fact, recent relative performance has been quite strong, as the market shifted to a more cyclically oriented phase—even though the sector doesn’t typically lead in this phase.

The sector still faces challenges, however. Global growth is not expected to provide an enduring tailwind to industrial metals or demand for chemicals (the largest industry in the sector). Although gas prices have rebounded off lows recently along with the price of crude oil, weakness in demand for gasoline continues to weigh on ethanol demand and corn prices, further reducing demand for agriculture chemicals. Even moderately cheap oil prices and reduced cost of production will not make up for weak ongoing demand for chemicals.

Relative valuations are ranked in the middle of the pack, as other sectors continued to see earnings expectations fall. While the underlying fundamentals remain challenged, earnings and revenue expectations have begun to recover amid budding global economic optimism—albeit from a very low base. Putting it all together, we have upgraded our view from underperform to a marketperform rating for the Materials sector.

Sector Overview: Materials

Materials

Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The  Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or central bank policy changes.  

Source: Charles Schwab, as of 06/09/2020

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
  • Marketperform: likely to track the broader stock market

 

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. Clients can log in to see our top-rated stocks in the Materials sector.

 

* As represented by the S&P 500 index

Communication Services Health Care
Consumer Discretionary Industrials
Consumer Staples Information Technology
Energy Real Estate
Financials Utilities

 

What You Can Do Next

Information Technology Sector Rating: Marketperform
Financials Sector Rating: Outperform

Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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