If you invest in the materials sector, it's not a stretch to say that you're investing in the very building blocks of … well, just about everything.
Wherever you are right now, take a look around. Walls, ceiling, lights, table, chairs, TV, computer, phone. Depending on the item, it might have been made by companies across several sectors – but the wood, plastic, metals, resins, paints or chemicals needed to make that item came from the materials sector.
And yet, despite materials' presence in everything, the sector is anything but defensive. On the contrary – it's often as cyclical as it gets, making it vital to understand the various dynamics that pull and push material stocks around.
Today, we'll examine the materials sector. We'll start by slapping a definition on it, then explain why investors might want to have exposure to these companies and finish up by showing you how to find the best materials stocks to buy.
What are materials stocks?
The Global Industry Classification Standard (GICS) – a framework used by major index providers to help classify public companies – gives us a pretty helpful, straightforward answer:
"The Materials Sector includes companies that manufacture chemicals, construction materials, forest products, glass, paper and related packaging products, and metals, minerals and mining companies, including producers of steel."
Or more broadly put, materials companies produce raw and/or refined materials, which are then used in the production of other things. It could be steel that's used in the making of a bridge, paint that's used to finish an automobile, or even a cardboard box – itself technically a finished product, but a product that's not actually "used" until goods are packed and shipped in it.
Why do investors buy materials stocks?
Materials companies are one of the ultimate cyclical bets.
In theory, it's pretty straightforward: If a product is in high demand, that will flow through to higher demand in the materials required to make said product – and that high demand typically comes alongside robust economic growth.
If people have more money to buy houses, that's more business for companies that produce lumber, siding, piping and paints. If governments have more money to spend on infrastructure, that benefits companies that produce concrete, steel, and glass.
But naturally, that works in reverse, too: When the economy slows, demand for products slows, and with that goes demand for those component materials.
Reality isn't terribly different from theory, but it can be more complicated – material cycles can differ in timing, some materials are more cyclical than others, while others might enjoy durable demand. Gold miners are a particularly tricky industry within the materials sector because gold doesn't just have product uses – it's also a popular alternative investment that many investors use to hedge against uncertainty and inflation.
Speaking of which, materials stocks in general can sometimes be used as a way to leverage rising consumer prices:
"The materials sector can also be a hedge against inflation, because companies that produce basic materials are able to raise their prices in a growing economy without putting a dent in demand," writes Jonathan Linden, executive director and senior U.S. equity strategist at J.P. Morgan Global Wealth Management. "On the other hand, if inflation is out of control or the economy contracts swiftly, demand could collapse and so could the dividends and share prices of basic materials sector companies."
As it pertains for 2025 specifically?
At least as of the start of the year, the world is in what appears to be a period of declining interest rates – and if that continues, that could help spur the growth necessary to keep materials stocks afloat. But the most important economies to watch are the largest ones: Conditions in countries such as the U.S. and China, among others, have outsized importance in the fate of many materials stocks.
How to find the best materials stocks to buy
We can't predict exactly what you might want out of the materials sector, but we can help you start your search with a basic quality screen that includes some minimum thresholds for growth, value and income.
To get to the following list of the best materials stocks to buy, we've looked for firms within the sector that …
Are within the S&P 1500: The S&P 1500 is made up of the S&P 500, S&P MidCap 400 and S&P SmallCap 600. In other words, our search will include a wide variety of large- and mid-cap stocks, as well as the market's larger small-cap stocks.
Have a long-term estimated earnings-per-share growth rate of at least 8%: Again, the materials sector is highly cyclical, meaning even the best stocks to buy that fall under this umbrella might have years in which their profits retreat. So we're setting a reasonable (but not overly ambitious) ceiling of long-term earnings growth expectations. (Just remember that expectations aren't a guarantee of results.)
Have a dividend of at least 1.2%: Some materials companies have a difficult time providing significant regular dividends because profits can vary so much from year to year. So if you were building your own screen, you could exclude this requirement. But in the hopes of getting a little bit of everything out of the sector, we've ensured that stocks in our search pay at least as much as the broader market right now.
Are cheaper than the market: The S&P 500 currently trades at a hair above 22 times next year's earnings estimates. So, all stocks on this list have a forward price-to-earnings (P/E) ratio of less than 22.
Have at least 10 covering analysts: We'd like to look at stocks that are on Wall Street analysts' radar, which makes it likelier that there's both more reporting and more insights on these companies. The more research we have at our disposal, the more educated a decision we can make.
Have a consensus Buy rating: All of the stocks must have an average broker recommendation of 2.5 or less within S&P Global Market Intelligence's ratings scale. S&P Global Market Intelligence converts analysts' ratings into a numerical scale. Anything with a score of 2.5 or less is considered a Buy.
