Chart of the Week

While Materials is a highly cyclical sector with strong operating leverage to the global economy, it also offers defensive traits that can help reduce the near-term risks of accelerating inflation to equity portfolios. We believe that geopolitical dynamics are increasing the focus on supply chain resilience, supporting structurally higher pricing power and improving reinvestment opportunities for many companies within the sector.

The Materials sector has significant international exposure, and we view current U.S. trade policy and tariffs as a net benefit. The renewed focus on domestic supply chains is creating additional demand and opportunities for U.S. expansion. As shown in the chart, the sector has generally performed well alongside rising producer price inflation.

We recently upgraded the Materials sector to favorable. Within the sector, we favor Industrial Gases for high margins, consistent pricing power, and diversified end-market demand; Construction Materials for potential infrastructure and heavy non-residential construction tailwinds, including data centers; and Specialty Chemicals for strong margin resilience through cycles. Overall, we believe each subsector offers attractive quality characteristics.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Materials industries can be significantly affected by the volatility of commodity prices, the exchange rate between foreign currency and the dollar, export/import concerns, worldwide competition, procurement and manufacturing and cost containment issues.

An index is unmanaged and not available for direct investment.

Producer Price Index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

S&P 500 Materials Index comprises those companies included in the S&P 500 that are classified as members of the GICS® materials sector.

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