By Jacob Sonenshine
Materials stocks have surged, and this time it could last. Their fundamentals are changing for the better, positioning the stocks as potentially viable long-term investments.
The State Street Materials Select Sector SPDR exchange-traded fund, home to metal miners, steel makers , and producers of chemicals, paints, and other goods needed for housing, is up 12% from a low point in October. Since then, the economic outlook has brightened as the Federal Reserve has cut interest rates, which should stimulate consumer demand and business investment. That tends to significantly boost the most economically sensitive stocks.
Now, every stock in the ETF is trading above its 50-day moving average, while fewer than 20% were that strong when the fund was at its October bottom, according to SentimenTrader. Data from the research shop going back to 2001 show that in the 11 instances when the percentage of holdings in the fund trading above the moving average jumped from 20% to 100%, returns have averaged 15.5% over the following 12 months.
It rose two-thirds of the time, with the largest increase at 58%. That is a lot of reward for not a lot of risk: The worst return was a 2.1% drop.
The wrinkle is that in the very short term, the stocks have more risk and less reward. In the one month following a surge in the portion of materials stocks trading above their 50-day moving averages, the average return is a 1.3% gain, with the worst loss at 8.3%.
That makes sense because when these economically sensitive stocks reach such heights, they quickly see selling pressure. Traders tend to unload the shares to lock in profits, reflecting the risk that the economy doesn't unfold perfectly.
Investors with time horizons longer than one month can look for moments to buy these stocks on dips. One option is to buy the materials fund, while buying the names doing the heaviest leg work in the sector -- the miners -- offers more direct exposure.
Buying dips on hopes for long-term growth in the miners is an especially interesting strategy now because it is entirely possible that these stocks are becoming more like growth investments than ever before. Much of the recent strength in the materials fund comes the $85 billion copper miner Freeport-McMoRan; Newmont, a $124 billion gold miner; and Albemarle, a $21 billion lithium miner.
Copper and lithium prices have surged because of a stronger global economic outlook and because electric vehicle batteries and data centers both require so much metal that the miners can't increase their supplies as fast as demand.
"With data center, if you look at demand for copper going out 10 years, it's going to massively outstrip supply," said Ben McMillan, chief investment officer of IDX Shares, which offers ETFs and mutual funds managing commodities and other assets.
That doesn't mean copper and lithium prices will no longer be volatile: They will be. Economic hard times in the U.S. or China will hit demand and prices.
But over the long term, the prices of both commodities could keep rising. With copper trading at almost $6 per pound today, a brief pullback to $5.25 would leave it looking fairly priced, says Chris Mancini, an equity portfolio manager at Gabelli Funds.
Long-term investors should consider buying Freeport-McMoRan or other large copper miners, such as Southern Copper and Teck Resources, when those stocks pull back from their current levels near record highs. Those comfortable assessing demand for lithium and electric vehicles should consider buying on dips in Albemarle stock, which is now near a multiyear high.
The key to remember is that buying the shares at reasonable prices yields the potential for large gains. When prices of commodities rise, sales rise by a similar percentage, but the companies' fixed costs don't change much. That expands profit margins and allows earnings to take off faster than sales.
The picture is brighter for gold as well. The price, on a tear for years, has gained another 10% in the past three months. The gains aren't likely to reverse because central banks worried about the long-term prospects of the dollar are buying the metal, and production by mining companies isn't keeping pace with the demand.
That spells higher prices, McMillan says, setting up the potential for higher profits at Newmont and the $84 billion Barrick Mining.
Times are changing, and so are commodity stocks.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 16, 2026 02:30 ET (07:30 GMT)
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