2026 has been the year of energy.
Oil and gas stocks started the year on a tear long before the Iran war started. And once the bombs started dropping, the bull market kicked into overdrive.
As for the “why,” pick your reason.
Energy stocks started the year dirt cheap, even while most of the rest of the stock market looked pricey by historical standards. The Trump Administration has been extremely supportive of oil and gas projects, lifting much of the red tape that has made production expensive and difficult.
The AI revolution requires massive amounts of energy that cannot possibly be met by renewable sources like wind and solar…
The list goes on.
But here’s the thing…
While energy has been getting most of the headlines, most of the same bullish arguments could be made for materials and mining stocks.
The last bull market was centered on “asset light” tech stocks… and investors had mostly lost interest in the gritty “real” economy. The Trump administration has made domestic mining, particularly of critical minerals, a major priority. And the AI revolution requires a massive amount of investment in property, plant and equipment.
Both energy and materials have also historically been good inflation hedges… and inflation may be heating up due to fallout from the Iran war.
2026 has been a great year for the materials sector. The State Street Materials Select Sector SPDR ETF (XLB) is up 11% year to date, making it the second-best-performing S&P 500 Index sector exchange-traded fund (ETF) after energy.
So, let’s do a deep dive into the materials sector to see what opportunities we might find.
A Peek Under the Hood
Things get interesting fast…
Despite the standout performance by materials this year, only four stocks in the entire sector rate as “Bullish,” meaning they have a score of 60 or higher. Nine more rate as “Neutral.” And fully half, at 13, rate as “Bearish.”
A “Bearish” Green Zone rating doesn’t guarantee that a stock immediately falls in value or that it absolutely must lag the market over the following year. Plenty of low-rated stocks enjoy their day in the sun and have a stretch of outperformance.
But the low ratings across the sector suggest that caution is warranted. The low ratings suggest that the run in materials stocks as a whole may not have staying power. That means we need to pick and choose carefully right now.
Where Do Materials Stocks Pick Up Points?
Let’s dig a little deeper to see what factors are driving the ratings of the materials sector.
The Green Zone Power Rating is a composite score based on six primary factors: momentum, size, volatility, value, quality and growth, each of which is composed of several sub-factors. (As we are looking at large-cap constituents of the S&P 500, I don’t consider size when doing the sector X-ray.)
I’ll admit I was a little surprised at first to see that quality was the dominant factor. Sixteen out of the 26 stocks rated as “Bullish” on quality.
The quality factor is a composite of various measures of profitability, balance sheet strength and asset turnover.
As a general rule, it tends to favor “asset light” businesses like software or services that can be massively scaled without a lot of ongoing capital spending.
Of course, materials companies are the 180-degree opposite of asset-light. They are distinctly asset-heavy. It takes a ton of capital to keep an aluminum mill or copper mine operational.
The high score comes down to profitability. Commodity prices are high right now, and that’s driving a profit surge for the companies delivering the goods.
The Best of the Best
I ran a screen for the top-ranked materials sector stocks. (The composite Green Zone Power Rating, blurred here, is reserved for paid subscribers to Green Zone Fortunes.)
And here’s what I got:
The top two stocks will need no introduction for Green Zone Fortunes readers. I recommended CF Industries (CF) at the end of February, and we’re already up over 30%.
As one of the world’s largest sellers of fertilizer, the company has enjoyed a bump from the Iran war and the closure of the Strait of Hormuz… through which about half of the world’s urea-based fertilizer flows.
I also recommended blue-chip gold miner Newmont Corporation (NEM) about a week ago, and we’re already up about 5%.
Gold took a tumble in March, as the Iran war – and a sudden shift in the Federal Reserve’s stance – led investors to dump gold and hoard dollars.
But the yellow metal quickly found a bottom and has been trending higher again for the past two weeks.
With inflation still high and our government’s finances looking sicker by the day, I expect gold to continue trending higher. And in Newmont, we get a “Strong Bullish” leveraged bet on it.
To good profits,
Adam O’Dell
Editor, What My System Says Today
