Chemical stocks: A crude awakening

2025 marked a year of significant valuation compression in the specialty-chemical universe, and 2026 is seeing a continuation of that trend. While not entirely unwarranted given a slowdown in broader sector volumes, the decline in valuation multiples was not selective. We look for growth in excess of underlying markets, particularly where an infection is building. We also look for companies that are facing temporary margin headwinds that are likely peaking under current conditions. Currently, many of the specialty-chemical stocks are trading at historic discounts as they wrestle with nonrecurring inflation that leaves room for earnings and valuation upside as costs are lowered and lapped, and the industrial and construction cycle engages. We expect 2027 to offer compelling growth for many of these companies, but how soon the market will discount this improvement and the 2026 baseline depends largely on what happens in the Middle East.

Commodity profits have accelerated accordingly. However, under the surface, these industries are managing through material oversupply, with many of the markets still expecting capacity additions to outstrip demand growth over the next 2+ years. Our view is, broadly, that the Strait is too geopolitically and economically important to stay closed, and as it opens, we expect to see a reversal in these recent profit fortunes. Accordingly, we cannot advocate for the deployment of new capital to a space that will see net profit atrophy and operating-rate compression over the medium term. 

Equity performance for the space may be stalled out near term as investors wait for more clarity on the path of crude oil. Simplistically, we believe the market will compress the valuations of companies overearning in commodity chemicals before it will expand valuations on downstream companies. While we continue to favor the latter, we understand that the combination of raw-material inflation and potential demand destruction creates a headwind to performance, even if the market has begun to discount the duration of the conflict in these upstream producers. There may be room for Agriculture to thread the needle between these two realities as a gridlock at Hormuz may just drive a more bullish backdrop in 2027.