MW Materials are the worst performer in the S&P 500 this year. What 2025 holds for this beaten-down sector.
By Isabel Wang
There might be a bullish story underway for materials stocks in 2025 - but watch out for this wild card
U.S. stocks are wrapping up another year with stellar gains, but not every sector is in the party spirit.
The S&P 500's materials sector XX:SP500.15 is the worst-performing corner among the large-cap benchmark index's 11 sectors so far in 2024, according to FactSet data.
With a 0.6% year-to-date decline, the sector tracking companies that produce or manufacture metals, chemical products and construction materials has underperformed the S&P 500's SPX 24% advance by the widest margin since 1998, according to Dow Jones Market Data.
By way of comparison, the tech-heavy S&P 500's communication-services sector XX:SP500.50 has popped 40% this year, while the information-technology sector XX:SP500.45 has gained 37.5% in the same period, according to FactSet data.
Materials stocks are usually considered a cyclical investment because demand for most of the materials used in mining, metal refining and construction is sensitive to the state of the global economy. If economic conditions weaken, demand for basic materials tends to decline, weighing on their prices and affecting profitability for materials companies. Commodity prices could also impact materials stocks.
In 2024, stocks in the materials sector have been under a lot of pressure - held back by ongoing worries about the strength of the U.S. economy, an economic slowdown in China and relatively high interest rates globally, said Ashley Fernandes, natural-resources sector leader and portfolio manager in the equity division at Fidelity Investments.
Fears of an economic slowdown in the U.S. have been at the forefront of investors' minds in 2024, yet the risk of a recession has been fading. The Federal Reserve also kept interest rates at a 23-year high for much of the year before starting to ease its monetary policy in September. The materials sector was also hammered by the slowdown in China, though that country's top leaders have pledged more stimulus measures to shore up the world's largest industrial economy.
See: Why BofA is bullish on the S&P 500's materials sector amid leadership shift in stocks
Jonathan Krinsky, chief market technician at BTIG, said the materials sector is the most "oversold" sector in the S&P 500. The relative strength index, or RSI, of the Materials Select Sector SPDR Fund XLB - a technical indicator used to measure the speed and magnitude of a security's price changes - was at 17 as of Thursday, the lowest since 2018.
Traditionally, an RSI reading of 30 or below indicates an oversold condition, suggesting that the security may be undervalued and due for a rebound.
"XLB began trading in 1998, and over that time there have only been 14 other days when daily RSI was below 20. Average returns 15 days later were 5.54%, with only one failure," Krinsky said in a Thursday client note. "History says to step in here and look for at least some tactical upside reversion."
Meanwhile, since 1990, the S&P 500's materials sector has never been down for consecutive years (see table below). The sector advanced over 10% last year before heading for negative returns in 2024. It's also worth noting its average annual return following a down year has been 20.43% since 1990, with only one year up less than 10%, Krinsky said.
Bullish story underway for 2025?
For 2025, Fernandes of Fidelity Investment thinks the materials sector is still likely to continue to track "the ups and downs" of the U.S. and global economies. But with interest rates now falling in many major economies, and with China unveiling further economic stimulus plans, it could usher in "a new cycle of growth" to help propel companies in this highly cyclical sector of the stock market.
"The possibility of global monetary easing and a recovering Chinese economy could bode well for growth, materials markets, and materials stocks in 2025," he said in a client note dated Dec. 13.
See: Calm before storm? Import inflation is low now, but Trump tariffs, pose fresh threat
However, Fernandes said one uncertainty that may weigh on the materials sector in the year ahead is President-elect Donald Trump's tariff policy on Chinese imports. But he acknowledged it's still difficult to make predictions about "the ramifications of public policy, especially since outcomes are often quite different than expected."
Talley Leger, chief market strategist at the Wealth Consulting Group, said Trump's tariff policy might be "more bark than bite," as the incoming president may use tariffs more as a strategy to "get our trade partners to sit at the table and come to a better agreement."
"At the end of the day, the 'industrial renaissance' is what Trump's trying to accomplish - reviving the manufacturing base and improving competitiveness here in the U.S.," Leger told MarketWatch via phone on Friday. "Essentially, raw materials are the basic building blocks of industrial revivals, and that potentially makes the sector an interesting derivative play."
Leger suggests investors be selective in sector allocation within the materials industry.
For example, the S&P 500's containers and packaging industry index XX:SP500.151030 has advanced nearly 18% so far in 2024, outpacing the 0.6% decline for the broader materials sector. Looking across the size spectrum, the S&P SmallCap 600 Materials index was also up 0.3% this year, slightly outperforming the large-cap S&P 500's materials sector index, according to FactSet data.
-Isabel Wang
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(END) Dow Jones Newswires
December 21, 2024 06:00 ET (11:00 GMT)
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