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 is sensitive to fluctuations in the global economy and the U.S. dollar, 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.
The sector still faces challenges, however. Global growth is not necessarily 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, still-weak demand for gasoline continues to weigh on ethanol demand and corn prices, further reducing demand for agriculture chemicals.
The sector has become more attractive recently. Valuations are high, but neutral relative to many other sectors, and fundamentals have begun to improve with a rebound in expected earnings—however, estimated income-generating efficiency is ranked lower in the field. While the macroeconomic factors are quite positive, we think that there are decent odds that the dollar will bounce due to heightened pessimism about its lofty value (a contrarian signal) before continuing lower over the next year or two. A shift to positive long-term momentum would also be a plus. We are keeping a watchful eye on the sector but maintaining a marketperform for now.
Sector Overview: 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 09/10/2020
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
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