ETF Insights | January 1, 2025 | Materials Sector
S&P 500 Materials Sector Price Action & Performance
The S&P 500 Materials Sector starts 2025 on an oversold condition after prices declined 11.5% in December. A perfect storm of weak demand for commodities, slowing industrial production and high rates constraining the housing market have conspired to make 2024 a terrible year for Materials Sector performance. The XLB (chart below) lagged the S&P 500 by more than 20% over the year with oscillator studies showing deeply oversold conditions in the near-term.
While we expect some bounce from oversold conditions, we have placed a modest bet on Energy Sector recovery rather than Materials this month. If rates continue to rise and eventually force investors out of the Growth trade, we could see Materials coming back in favor, but until we see evidence of this, we will remain on the sidelines.
S&P 500 Materials Sector: Industry & Sub-Industry Performance Trends
Weakness across industries accelerated into year-end. Metals & Mining lagged the S&P 500 by >30% while Containers & Packaging stocks were the strongest industry lagging by 6%. Construction Materials stocks (VMC, MLM) were unable to sustain outperformance from 2023 as “sticky” high rates have tamped down demand for housing.
S&P 500 Materials Sector Breadth
The Materials Sector is ground zero for a breadth wash out. Not a single stock in the sector is on pace to end the year above its 50-day moving average while only 20% of constituents are above their 200-day moving average. These are typically near-term buying opportunities, but most of our inputs on the sector remain negative and we are unwilling to make a big bet on a commodities rebound without some initial evidence of investor interest.
S&P 500 Materials Sector Top 10 Stock Performers
You are reading this correctly, not a single Materials Sector stock had a positive gain in December.
S&P 500 Materials Sector Bottom 10 Stock Performers
Chemicals stocks have had a horrible 2024. Typically, SHW, LIN and APD are stalwart stocks within the sector. Seeing two out of those 3 posting double-digit declines in December tells you all you need to know about how little enthusiasm there is for the sector.
S&P 500 Materials Sector Fundamentals
The chart below shows S&P 500 Materials Sector FCF yield and Dividend Yield as well as projected earnings over the next 3 years, valuation and trailing margins. Forward EPS estimates for the sector had been rising through September, likely on optimism that a new Trump Administration would be a boon to commodities related stocks and legacy industries. However, investors are focusing on the potential for tariffs to disrupt global trade and raise input prices.
Economic & Macro Developments
China’s economic data continued to weigh heavily on commodity markets. Industrial profits showed a sharp decline in December, underscoring demand challenges despite optimism around fiscal stimulus. Reports of China’s government targeting a record CNY3 trillion in special treasury bond issuance for 2025 offered some hope for infrastructure-driven demand recovery, though execution and timing remain uncertain. While the Shanghai Composite Index logged its first annual gain in three years, volumes were driven largely by domestic retail investors, with foreign investors remaining cautious.
Copper prices saw modest support from US and European infrastructure projects, highlighting their critical role in renewable energy and electric vehicles. US housing data offered a mixed picture: November pending home sales rose 2.2% m/m, but the Chicago PMI for December printed at 36.9, far below the consensus of 43.0, signaling persistent weakness in broader manufacturing activity. These trends underscored bifurcated demand dynamics, with infrastructure demand offset by broader industrial slowdown.
Policy Developments
US trade policies remain a looming uncertainty, with reports of potential new tariffs under a “Trump 2.0” administration raising concerns about disruptions to global commodity flows. This could directly impact metal and agricultural chemical exporters and importers. On a positive note, the Inflation Reduction Act (IRA) continued to bolster clean energy investments, supporting demand for critical materials like lithium, copper, and rare earth elements. This legislative support has been pivotal for companies like Albemarle and Freeport-McMoRan, aligning their growth prospects with global sustainability trends.
Inflationary pressures and Fed policies also influenced commodities markets. Persistent inflation through late 2024 contributed to a backup in bond yields, which hit seven-month highs in December. Higher borrowing costs create challenges for capital-intensive mining and processing projects, potentially tightening supply. However, the Federal Reserve’s easing cycle has mitigated some of these pressures, maintaining a relatively supportive financing environment.
2025 Outlook
The S&P 500 Materials sector is poised for cautious optimism in 2025, supported by a mix of structural and macroeconomic factors. The ongoing global energy transition will drive demand for key materials, particularly copper, aluminum, and lithium. Freeport-McMoRan and Albemarle are well-positioned to benefit from this trend as renewable energy and EV markets expand.
China’s fiscal stimulus, including the anticipated CNY3 trillion treasury bond issuance, could provide a significant boost to materials tied to construction and manufacturing, though uncertainty around the scale and pace of this recovery remains. On the domestic front, the potential reintroduction of US tariffs could disrupt raw material flows and weigh on profit margins for exporters.
Lower inflation and easing interest rate pressures in 2025 would benefit capital-intensive industries like mining and chemicals, improving profitability and incentivizing capacity expansions. Despite near-term challenges, the Materials sector is expected to remain a key beneficiary of infrastructure investment and clean energy transitions, provided geopolitical and economic uncertainties are managed effectively.
In Conclusion
The best thing going for the S&P 500 Materials Sector as it enters 2025 is that it ended 2024 unloved with prices at oversold conditions. If rising rates and outsized expectations lead to disappointing corporate earnings we could see rotation into laggard sectors and we would expect the Materials Sector to benefit in that scenario. We have hedged against this dynamic by going long the Energy and Industrials Sector, but we are unwilling to go long the entire commodities complex. As a result, we enter 2025 with the Materials Sector as a zero-weight position in our Elev8 Sector Rotation Model Portfolio resulting in an underweight exposure of -1.99%.
