The Morningstar US Basic Materials Index slightly outperformed the US Market Index during the fourth quarter of 2025. Yet we continue to see significant opportunities across the sector, with 55% of stocks trading in 4- or 5-star territory. We see the most opportunities in chemicals and agriculture. Weak demand leading to guidance below consensus estimates caused shares of multiple chemicals producers to sell off during the quarter, while US-China soybean trade uncertainty led to a fall in agriculture input stocks, as the market grew concerned about 2026 profits.
In agriculture, premium seeds producers should be poised for profit growth in 2026. Farmers need to buy seeds to plant crops and are generally willing to pay up for new seed technologies that help boost crop yields, regardless of crop prices. This makes seeds less cyclical than other ag inputs, such as fertilizer or crop chemicals, where farmers may reduce purchases when crop prices are low.
A Little Less than Half of Basic Materials Stocks Trade in 5-Star or 4-Star Territory
The Institute for Supply Management’s Purchasing Managers’ Index is below 50, indicating a contraction. Due to continued uncertainty, we expect weak demand to persist through the first half of 2026. But over the long term, we expect demand to normalize, leading to stronger profits in the coming years.
The ISM’s PMI Indicates Contraction, Driving Weak Near-Term Chemicals Demand
Due to oversupply, lithium prices hit a multiyear low in mid-2025 at roughly $8,000 per metric ton. Thereafter, prices began to rise and are now around $11,000 per metric ton. Current lithium futures, which inform our near-term forecast, indicate lithium prices will remain at this level in 2026. In the longer term, we see prices rising to $20,000 per metric ton, in line with our marginal cost estimate, as demand outpaces supply, driven by battery growth. This should boost producer profits.
Lithium Prices Began to Rise in H2 2025, and We See Higher Average Levels in 2026
Top Basic Materials Sector Picks
Eastman Chemical Company
- Fair Value Estimate: $100.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
Eastman EMN is our top pick to invest in a medium-term rebound in chemicals demand. The stock trades more than 35% below our $100 fair value estimate. Eastman’s narrow moat rating comes from its specialty chemicals, which are protected by patents and command premium pricing. This should allow the company to perform better than its commodity chemicals peers during a downturn and see a quick recovery when demand returns. Eastman should continue to generate free cash flow above dividends even in the downturn and maintains a healthy balance sheet, which should support shares.
Corteva
- Fair Value Estimate: $80.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
Corteva CTVA is our top pick to invest in premium seeds growth. The stock trades at nearly a 20% discount to our $80 fair value estimate. Corteva’s wide moat comes from its seeds business due to its patented premium seeds that help farmers boost yields. Corteva invests roughly 8% of its sales in research and development, enabling it to develop new products. As Corteva launches new seed and crop protection products, we expect they will drive sales growth and margin expansion over time.
Albemarle
- Fair Value Estimate: $200.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Very High
Albemarle ALB is our top pick to invest in rising lithium prices. The stock trades around 35% below our $200 fair value estimate. Albemarle’s narrow moat rating stems from its cost-advantaged lithium production, which leverages two of the lowest-cost, highest-quality resources globally. In response to low lithium prices, Albemarle cut most of its capital expenditures and implemented an overhead-cost-reduction plan. This will allow the firm to generate positive free cash flow in 2025 even as lithium prices bottom out. As prices recover, the company is poised for strong profit growth in the coming years.
