Even as the lift from optimism over prospects for U.S.-China trade detente shows signs of wearing off for the wider U.S. stock market, upbeat sentiment around China's economy could bolster shares of materials companies.
Shares of S&P 500 industrial and technology companies, which were buffeted by last year's tit-for-tat tariffs as well as slowing global demand, have been very responsive to progress in U.S.-China trade relations and a strengthening Chinese economy. This year, those sectors have outpaced the ascent in the S&P 500, which reached a record closing high on Tuesday.
Materials stocks have not been as sensitive, however, even though they also stand to benefit as a stronger Chinese economy lifts global consumption and industrial output.
"What we're seeing is China spending more on stimulus: fiscal stimulus and monetary stimulus," said Kristina Hooper, chief global market strategist at Invesco in New York. "That's likely to be a positive for materials."
The People's Bank of China has cut banks' reserve requirement ratio five times over the past year and is widely expected to ease policy further to spur lending and reduce borrowing costs. The stimulus appears to have boosted Chinese economic data, with factory activity growing in March for the first time in four months.
Yet so far in 2019, the S&P 500 materials index has underperformed the S&P 500 at large, rising just 11.9% compared with 16.7% for the benchmark index. Moreover, it is among the biggest decliners in the period since the S&P's previous record closing level on Sept. 20. The materials index has fallen 7% over those seven months, versus a 5.2% gain for technology and a 3% loss for industrials. Only the energy index has dropped more over that period.
A trade agreement could serve as a catalyst for a bump in materials shares as a drag on China's economy is lifted, some market strategists say. Some commodity prices, including those for copper and oil, have ascended this year as the prospects for the global economy have somewhat brightened.
"It all goes back to the global growth outlook," said Andrea DiCenso, portfolio manager for alpha strategies at Loomis Sayles in Boston. "With the front runner in hard data, we're beginning to see a pretty significant rally."
Additionally, a trade agreement is expected to include commitments from China to purchase higher quantities of U.S. products such as soybeans, which could benefit companies that make agricultural chemicals, including DowDuPont Inc and CF Industries Holdings Inc.
CF Industries is scheduled to report quarterly results after the bell on Wednesday, and DowDuPont is scheduled to report before the market open on Thursday.
To be sure, even with a trade agreement, some materials companies could face price pressures. Shares of Freeport-McMoRan Inc fell 10.1% on Thursday after the copper mining company posted a lower-than-expected profit as its production slipped and its costs rose.
A rollback of tariffs on Chinese imports, particularly aluminum and steel, would likely prompt a fall in some commodity prices, which could hurt prospects for certain materials companies, said Gene Goldman, chief investment officer at Cetera Investment Management in El Segundo, California.
Even so, those drawbacks may be outweighed by the support for global demand fostered by a U.S.-China trade agreement.
"You could see a number of companies with lowered expectations bring them back up as they talk favourably about the impact that a trade deal would have on them," said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.