Sector Analysis: Non-energy Materials
The Alpha Engineer Research
Market Overview
The Non-energy Materials sector has followed a volatile path since 2022, initially seeing signs of life in 2023 as growth resumed and inflation cooled (while remaining moderately elevated), before facing headwinds in 2024. Since 2025 materials showed resilience in a market dominated by the word ‘tariff’. Now, with Trump's extraordinary tariffs causing market turbulence and raising stagflation concerns, the sector sits at a critical juncture.
The current market environment presents a complex picture for Materials stocks. The proposed tariffs could potentially trigger a stagflationary environment with mixed impacts across the sector. However, unless we experience an outright deflationary environment with minimal government intervention (an unlikely scenario), inflationary pressures will likely persist as governments rely on fiscal spending to support their economies, return to modest growth and reduce the impact of deglobalization.
A weakening USD could also reignite emerging markets and potentially spark a commodity boom. When we examine the data objectively, it's conceivable that large segments of the Materials sector could outperform over the next decade, especially compared to the post-financial crisis period where the sector largely underperformed financials and technology.
Quantitative Assessment
I conducted a 10-stock portfolio backtest of The Alpha Engineer model focusing exclusively on this sector. The methodology followed a straightforward, rules-based approach that can be replicated live using the weekly ranking:
Filter to include only liquid stocks from the non-energy materials sector
Consider only stocks with a ranking of 95 or higher for purchase
Sell positions when rankings dropped below 90 (or when stocks disappeared from the ranking entirely)
The portfolio maintained generally 10 stocks except for brief periods. The results demonstrate clear outperformance compared to both the broader market and sector-specific ETFs:
23% CAGR for the Materials-only portfolio
Compared to XLB (Materials Select Sector SPDR Fund) and S&P 500, both significantly lower: 5% and 12% respectively
However, still below the 36% CAGR achieved by the full Model Portfolio
While it is not the best example due to past macro headwinds, there is a key insight here: sector-specific portfolios, while potentially strong performers, still benefit from the diversification provided by the complete model. This is because a diversified portfolio typically buys stocks with a higher average ranking than a portfolio limited to a specific sector.
Recent Performance Shift
Since 2023, we've observed a change in performance trajectory for the top material stocks, delivering 36% CAGR (including the market crash of April 3th and 4th). The YTD results are particularly strong. However, if growth suddenly stalls due to tariffs, we could experience downside pressure similar to 2018 or 2022. The near-term outlook remains uncertain.
