Key Highlights

• The Materials Select Sector SPDR ETF has risen 23 percent over three years, lagging the S&P 500 by approximately 45 percentage points.

• Historically, similar underperformance gaps of 20 points or more have preceded average outperformance of 1.1 points over the following six months.

• The ETF trades at 16.7 times forward earnings estimates, a roughly 19 percent discount to the S&P 500, wider than its typical five-year average discount of 14 percent.

• Analysts project 7 percent annual sales growth and 27 percent annual earnings per share growth for ETF holdings from the end of 2025 through 2027.

A Historic Underperformance Gap With Precedent for Reversal

The Materials Select Sector SPDR exchange-traded fund has risen 23 percent over the past three years, a period during which it lagged the S&P 500 by approximately 45 percentage points. This magnitude of underperformance is historically significant, as data shows that following three-year periods where the materials ETF trailed the index by 20 percentage points or more, the fund has tended to outgain the benchmark in subsequent periods.

According to Dow Jones market data, the materials fund's average returns have exceeded the S&P 500 by 1.1 percentage points over the following six months and by 0.2 percentage points over the subsequent year after similar historical underperformance gaps. While past patterns do not guarantee future results, this data point provides a quantitative basis for considering the sector's current valuation relative to its own history.

Valuation Discount Exceeds Historical Norms

Materials stocks currently trade at notably favorable valuations relative to the broader market. The materials ETF trades at 16.7 times aggregate analyst earnings estimates for the coming 12 months, representing roughly a 19 percent discount to the S&P 500's valuation of just over 20 times earnings.

This discount is meaningfully wider than the sector's average five-year discount of approximately 14 percent, suggesting materials stocks may be pricing in more pessimism than historical patterns would typically justify. The sector's cyclical nature, meaning demand sensitivity to broader economic conditions, currently works in its favor given that the economy continues to grow at a moderate pace. Citi strategist Scott Chronert maintains an overweight rating on materials, citing reduced inflation concerns tied to oil prices falling closer to pre-conflict levels, which supports expectations for a continued soft landing scenario rather than aggressive Federal Reserve rate hikes.

Diversified Holdings and Earnings Growth Support the Investment Case

The materials ETF benefits from diversification across multiple subindustries, reducing dependence on any single commodity or end market. Holdings include metal manufacturers Nucor and Steel Dynamics alongside copper miner Freeport-McMoRan, all of which benefit from rising metals prices, as well as paints maker Sherwin-Williams, which draws on housing and consumer demand trends distinct from industrial metals pricing.

The fund also holds industrial gas producers Air Products & Chemicals and Linde, whose performance depends on demand from companies spanning multiple sectors rather than a single economic driver. This diversification could help cushion the ETF against weakness in any individual subindustry, though it also means the fund's overall performance depends on a broad and somewhat unpredictable mix of economic factors. Analysts project sales growth of 7 percent annually for ETF constituents from the end of 2025 through 2027, with anticipated margin expansion contributing to projected earnings per share growth of 27 percent annually over the same period, though these forward estimates carry inherent uncertainty tied to broader economic conditions.

Conclusion

The materials sector's substantial historical underperformance relative to the S&P 500, combined with a wider than average valuation discount, presents a data-supported case for potential mean reversion, particularly if moderate economic growth and easing inflation concerns persist. The ETF's diversified holdings across metals, industrial gases, and consumer-linked materials companies provide some insulation against sector-specific volatility. Whether projected earnings growth materializes as anticipated is likely to depend heavily on the trajectory of broader economic conditions and commodity price trends in the coming years.