As Markets Hit Records, Can This Red-Hot Sector Keep Soaring?

The stock market had a strange day on Friday, as pockets of the market performed quite well while others took fairly large hits. More extreme measures to control the COVID-19 pandemic overseas have started to make U.S. investors nervous, as lockdowns could exacerbate supply chain problems and result in headwinds to global economic expansion. That's a big part of why the Dow Jones Industrial Average (^DJI 0.69%) and S&P 500 (^GSPC 1.20%) were down on Friday, even as the Nasdaq Composite (^IXIC 1.59%) hit yet another record closing high above 16,000.

Data source: Yahoo! Finance.

Just about every investor knows that the electric vehicle space has gotten a lot of attention from the market community, sending shares of EV manufacturers sharply higher. The trend has also benefited lithium stocks immensely, and key players in that space posted sharp gains on Friday. Yet given that lithium production is largely a commodity business, some investors question whether those stocks deserve to participate in the same bull market run as the EV manufacturers themselves. Below, we'll look at how lithium stocks have behaved lately and what the future could bring.

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Another big day on the lithium front

Major producers of lithium had another strong day. Lithium Americas (LAC) was the biggest gainer, rising 13% to an all-time high. The company got favorable comments from stock analysts at J.P. Morgan, boosting their price target on the lithium stock by $11 per share to $39. Analysts like the fact that Lithium Americas has been aggressive in pursuing strategic acquisitions to become a bigger player in the fast-growing space.

Yet other lithium stocks were also up amid strong lithium prices and a favorable environment overall. Albemarle (ALB 1.71%) was up about 2.5% Friday, while Piedmont Lithium (PLL 3.47%) picked up 4%. Livent (LTHM) gained a more modest 1%. Even Standard Lithium (SLI), which had seen substantial declines Thursday after short-selling researchers criticized the company, bounced back with a 16% rise on Friday.

The bull and bear case for lithium

Essentially, investors in the lithium space are counting on continuing rises in demand for lithium as part of the battery systems for electric vehicles. With production figures on the rise not only among industry giant Tesla (TSLA 1.85%) but also for the many up-and-coming Chinese EV manufacturers, the need for batteries that can power those vehicles is exploding higher.

The big question is whether battery technology will keep relying on lithium indefinitely. At least so far, the answer to that question seems to be yes, with even some of the more innovative players in the battery technology space staying focused on the favorable chemical qualities of lithium. For example, QuantumScape (QS 3.71%) hopes to scale up production of a battery alternative that it believes is superior to current conventional EV batteries, but even QuantumScape's design still uses lithium -- albeit in a different way.

Regardless, one thing investors need to keep in mind is that while EV technology providers are on the cutting edge of innovation, lithium producers will fiercely compete to find the best resources to meet demand. That could squeeze everyone in the industry, and so it's not a foregone conclusion that every lithium stock will participate fully in the EV revolution in the years to come.