Wells Fargo’s brokerage, investing and financial advisory division is highlighting one S&P 500 sector that could act as a defensive investment as some stock prices reach inflated levels.
Wells Fargo Advisors says that it has a “favorable” rating on the materials sector because a “combination of cyclical and secular forces are aligning to improve” the sector’s outlook. The materials sector includes industries such as containers and packaging, chemicals, metals and mining as well as construction materials.
According to Wells Fargo Advisors, the US materials sector “offers defensive traits that can help reduce the near-term risks of accelerating inflation to equity portfolios” and could become even more attractive to investors going forward.
“The Materials sector has high international exposure, and we view current U.S. global trade policy and tariffs as a net benefit to the sector as a whole. Although some companies face tariff-related risks, many high-quality Materials companies have diversified global operations that help to limit negative tariff impacts, while others (such as steel producers) are direct beneficiaries of tariffs.
Additionally, the renewed focus on domestic supply chains is creating additional demand and opportunities for U.S. expansion.”
On the sub-sectors within the materials sector that are particularly appealing to investors, Wells Fargo says industrial gases, specialty chemicals and construction materials are currently offering “strong quality characteristics.”
“With respect to Industrial Gases, we are attracted to high margins, consistent pricing power, and broadly diversified end market demand.
Our view is that the Construction Materials sub-sector should benefit from strength in infrastructure and heavy non-residential construction (including data centers), where competition within the industry is limited.
In Specialty Chemicals, we believe that most companies have the ability to maintain strong margins throughout cycles due to sticky customer relationships and their ability to deliver a unique value proposition.”
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