The basic materials sector has been underperforming the market for several years. Here is the chart of the ratio of XLB (Basic Materials Sector ETF) vs. SPY. We believe that this trend is about to reverse. The bullish case for the Basic Materials sector rests on a convergence of macroeconomic, geopolitical, and structural factors that enhance demand and pricing power for core commodities. Here’s a breakdown across three thematic pillars:
1. Global Infrastructure & Energy Transition Tailwinds
Massive public and private infrastructure investments, especially in the U.S., Europe, and Asia, are boosting demand for construction materials, industrial metals, and chemicals. Initiatives like the U.S. Infrastructure Investment and Jobs Act and Europe’s Green Deal are driving multi-year demand for steel, copper, aluminum, and cement. Meanwhile, the clean energy transition—centered around electric vehicles, renewable energy, and battery storage—requires vast quantities of lithium, nickel, and rare earths. As countries rewire their economies toward decarbonization, companies in XLB that supply these raw materials are poised to benefit from secular growth, pricing premiums, and capital inflows.
2. Supply Constraints and Commodity Scarcity Premium
Many key basic materials are facing tight supply conditions after years of underinvestment in mining and exploration. Environmental restrictions, geopolitical instability in resource-rich regions, and permitting delays have constrained new capacity. For example, copper—critical to both industrial and green applications—faces a projected multi-year deficit. This imbalance is giving producers stronger pricing power and widening margins. With demand trends remaining strong and inventory levels below historical averages, companies in the XLB ETF could experience enhanced earnings leverage as commodity prices firm or rise.
3. Inflation Hedging and Economic Reacceleration Potential
Basic materials have historically served as effective hedges against inflation due to their real-asset backing and sensitivity to rising input costs. If inflation proves sticky or re-accelerates due to energy shocks, wage pressure, or global supply disruptions, investors may rotate back into materials stocks. Moreover, with signs of a global industrial rebound—especially from China’s potential stimulus, U.S. manufacturing reshoring, and cyclical upturns—demand for basic materials could rise sharply. As economic momentum builds, the operating leverage embedded in XLB constituents (like miners, chemical producers, and building materials firms) can translate into outsized EPS growth relative to other sectors.
Dennis Leontyev
