S&P Materials’ 98% Rally Has Room to Run as Recovery Quickens


A rally that has pushed the S&P 500 Materials Index to an all-time high has more room to run, thanks to a combination of economic forces including higher prices for raw materials.

Shares in companies such as copper miner Freeport-McMoRan Inc. and lithium producer Albemarle Corp. have soared on commodity price increases, helping to push the index up 98% higher since its crash a year ago. The gains have made the sector the best performing after energy on the S&P 500 in a trend analysts say could continue.

“The industrial economy remains on a strong upward trajectory and stocks have further room to run,” analysts at Jefferies wrote in a note, referring to materials and industrial equities.

A Jefferies analysis shows that end-market demands are continuing to improve from a low last year, which supports the view materials could continue to lead the market through 2021.

Looking ahead, forecasts for gross domestic product are among the most promising indicators for materials. U.S. Real GDP is due to expand 5.7% in 2021, up from a 3.5% decline in 2020, according to data compiled by Bloomberg. Likewise in China -- one of the biggest consumers of raw materials -- real GDP is expected to expand 8.5% in 2021, up from last year’s 2.3%.

S&P Materials’ 98% Rally Has Room to Run as Recovery Quickens

Fiscal stimulus and a weaker U.S. dollar should also provide a supportive backdrop for the sector in addition to a broader market rotation into value-oriented stocks.

The selloff in growth stocks has provided a boost to cyclical sectors including materials, and recent signals may imply value is starting to gain an edge over growth, Bloomberg Intelligence Chief Equity Strategist Gina Martin Adams said.

Of course, with a rally this big, investors may question if it’s time to rotate out of the sector. However, Jefferies wrote valuations have yet to overshoot fundamentals.

“The main reason why materials is not getting more expensive in both large and small [stocks] despite strong performance is that earnings estimates are really moving higher,” the firm wrote. Some of the top picks within materials for Jefferies include Freeport, Anglo American Plc, Huntsman Corp., Trinseo SA, Covestro AG, Univar Solutions Inc. and Linde Plc.

To be sure, the world is not yet out of the woods from the Covid-19 pandemic, even with vaccine rollouts, as a resurgence is cases continues to worry investors. And the same goes for the materials sector.

“Our positive view of materials stocks depends on whether the global economic recovery gathers pace,” Talley Leger, senior investment strategist at Invesco, said. “Should the economy suffer a relapse, it would likely be difficult for materials stocks to continue outperforming.”

©2021 Bloomberg L.P.

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