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. Although accommodative monetary and fiscal policies have boosted global economic growth, and recent trade agreements have eased some of trade uncertainty, the sector still faces significant challenges.
For example, still-tepid global growth is not expected to provide an enduring tailwind to industrial metals or demand for chemicals. Relative valuations and fundamentals remain poor. While revenue growth is expected to recover from a deep drawdown in 2019, only modest growth is expected over the next two years.
Earnings are expected to recover and grow moderately, boosting profit margins—however, wage costs are rising in the Materials sector, as we've seen skilled-labor shortages in certain segments of the market. Finally, relative strength in sector performance—both shorter and longer term—has dramatically lagged the broader market and other sectors, and we don’t see a catalyst to change this.
Sector Overview: Materials is negative on Fundamental and Relative Strength
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 anticipated tax legislation.
Source: Charles Schwab, as of 01/23/2020.
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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