Materials

For more than two years we’ve discussed the supply-side risks to commodity producers stemming from capacity built during the manic “Third Act” of last decade’s Three Act Play in commodities. Commodity-oriented equities have indeed underperformed since 2011, but to date, most pundits have laid blame squarely on the demand side.

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Year-over-year EPS growth rate for companies with Q2 reports (with about 65% in) currently stands at +4.2%, while revenue growth has come in at a better than expected +2.6%.

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But Information Technology rises to the top of the Domestic model, while the trend of Financials domination in the Global model remains intact.

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There are some substantial deviations in sector performance depending on your constituents and weighting scheme while, simultaneously, betas are converging toward one another.

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Our Domestic Scores have five Financials groups rating Attractive; these same five industry groups are Attractive in our Global model. In total, seven Financials groups rank Attractive in the Global model, with insurance groups looking particularly Attractive.

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With the notable exception of the Consumer Discretionary sector, cyclical stocks topped out globally on a relative basis in early 2011 (Chart 3). Throughout the last two and one half years, there have been repeated calls for industrial cyclicals—which were, of course, the leaders of the last cyclical bull market—to reassume stock market leadership.

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Commodity producers seem to believe that last decade’s commodity boom is set to repeat. This belief itself probably ensures that it won’t.

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Energy looks cheaper and appears much more washed out from a sentiment perspective. Contrarians looking for commodity exposure should favor this sector over Materials. 

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Select Industries portfolio has added new equity group holdings in Aluminum, initiating sector exposure in Materials.

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Per our work, sectors like Consumer Discretionary and Technology provide a better way to capitalize on the global recovery now underway.

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Materials sector has fallen fast and hard in our GS Score rankings and is now the worst rated. Still see further downside based on valuations and technical factors. No, we do not think the underlying commodities can outperform while the stocks fall.

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Inflation is peaking and the GS Scores did a great job signaling an exit from the Industrial Metals play. Commodities were hit hard in July.

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There remains considerable macro support for industrial commodities. 

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The Materials sector moved up to the top position in the latest Sector Power Rankings, based on the number of Attractive and Unattractive groups in each sector.

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Using Breadth Dynamics to assess strength of small cap stocks versus large cap stocks within various broad market sectors: Health Care, Materials, Consumer Discretionary, and Energy.

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