diff --git a/Gems/Atom/RPI/Code/Include/Atom/RPI.Edit/Material/MaterialSourceData.h b/Gems/Atom/RPI/Code/Include/Atom/RPI.Edit/Material/MaterialSourceData.h
index a67477f061..53d3072370 100644
--- a/Gems/Atom/RPI/Code/Include/Atom/RPI.Edit/Material/MaterialSourceData.h
+++ b/Gems/Atom/RPI/Code/Include/Atom/RPI.Edit/Material/MaterialSourceData.h
@@ -31,6 +31,7 @@ namespace AZ
         static constexpr const char UvGroupName[] = "uvSets";
 
         class MaterialAsset;
+        class MaterialAssetCreator;
 
         //! This is a simple data structure for serializing in/out material source files.
         class MaterialSourceData final
@@ -78,15 +79,33 @@ namespace AZ
 
             //! Creates a MaterialAsset from the MaterialSourceData content.
             //! @param assetId ID for the MaterialAsset
-            //! @param materialSourceFilePath Indicates the path of the .material file that the MaterialSourceData represents. Used for resolving file-relative paths.
+            //! @param materialSourceFilePath Indicates the path of the .material file that the MaterialSourceData represents. Used for
+            //! resolving file-relative paths.
             //! @param elevateWarnings Indicates whether to treat warnings as errors
             //! @param includeMaterialPropertyNames Indicates whether to save material property names into the material asset file
             Outcome<Data::Asset<MaterialAsset>> CreateMaterialAsset(
                 Data::AssetId assetId,
                 AZStd::string_view materialSourceFilePath = "",
                 bool elevateWarnings = true,
-                bool includeMaterialPropertyNames = true
-            ) const;
+                bool includeMaterialPropertyNames = true) const;
+
+            //! Creates a MaterialAsset from the MaterialSourceData content.
+            //! @param assetId ID for the MaterialAsset
+            //! @param materialSourceFilePath Indicates the path of the .material file that the MaterialSourceData represents. Used for
+            //! resolving file-relative paths.
+            //! @param elevateWarnings Indicates whether to treat warnings as errors
+            //! @param includeMaterialPropertyNames Indicates whether to save material property names into the material asset file
+            //! @param sourceDependencies if not null, will be populated with a set of all of the loaded material and material type paths
+            Outcome<Data::Asset<MaterialAsset>> CreateMaterialAssetFromSourceData(
+                Data::AssetId assetId,
+                AZStd::string_view materialSourceFilePath = "",
+                bool elevateWarnings = true,
+                bool includeMaterialPropertyNames = true,
+                AZStd::unordered_set<AZStd::string>* sourceDependencies = nullptr) const;
+
+        private:
+            void ApplyPropertiesToAssetCreator(
+                AZ::RPI::MaterialAssetCreator& materialAssetCreator, const AZStd::string_view& materialSourceFilePath) const;
         };
     } // namespace RPI
 } // namespace AZ
diff --git a/Gems/Atom/RPI/Code/Include/Atom/RPI.Reflect/AssetCreator.h b/Gems/Atom/RPI/Code/Include/Atom/RPI.Reflect/AssetCreator.h
index abdbe9cdce..79d43d0b8d 100644
--- a/Gems/Atom/RPI/Code/Include/Atom/RPI.Reflect/AssetCreator.h
+++ b/Gems/Atom/RPI/Code/Include/Atom/RPI.Reflect/AssetCreator.h
@@ -118,7 +118,7 @@ namespace AZ
 
             ResetIssueCounts(); // Because the asset creator can be used multiple times
 
-            m_asset = Data::AssetManager::Instance().CreateAsset<AssetDataT>(assetId, AZ::Data::AssetLoadBehavior::PreLoad);
+            m_asset = Data::Asset<AssetDataT>(assetId, aznew AssetDataT, AZ::Data::AssetLoadBehavior::PreLoad);
             m_beginCalled = true;
 
             if (!m_asset)
@@ -138,6 +138,7 @@ namespace AZ
             }
             else
             {
+                Data::AssetManager::Instance().AssignAssetData(m_asset);
                 result = AZStd::move(m_asset);
                 success = true;
             }
diff --git a/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/LuaMaterialFunctorSourceData.cpp b/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/LuaMaterialFunctorSourceData.cpp
index b230953f8c..14ef3bb17d 100644
--- a/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/LuaMaterialFunctorSourceData.cpp
+++ b/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/LuaMaterialFunctorSourceData.cpp
@@ -137,7 +137,10 @@ namespace AZ
             }
             else if (!m_luaSourceFile.empty())
             {
-                auto loadOutcome = RPI::AssetUtils::LoadAsset<ScriptAsset>(materialTypeSourceFilePath, m_luaSourceFile);
+                // The sub ID for script assets must be explicit.
+                // LUA source files output a compiled as well as an uncompiled asset, sub Ids of 1 and 2.
+                auto loadOutcome =
+                    RPI::AssetUtils::LoadAsset<ScriptAsset>(materialTypeSourceFilePath, m_luaSourceFile, ScriptAsset::CompiledAssetSubId);
                 if (!loadOutcome)
                 {
                     AZ_Error("LuaMaterialFunctorSourceData", false, "Could not load script file '%s'", m_luaSourceFile.c_str());
diff --git a/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/MaterialSourceData.cpp b/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/MaterialSourceData.cpp
index 1467b017d5..d6308ec655 100644
--- a/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/MaterialSourceData.cpp
+++ b/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/MaterialSourceData.cpp
@@ -17,6 +17,7 @@
 #include <Atom/RPI.Edit/Common/AssetUtils.h>
 #include <Atom/RPI.Edit/Common/JsonFileLoadContext.h>
 #include <Atom/RPI.Edit/Common/JsonReportingHelper.h>
+#include <Atom/RPI.Edit/Common/JsonUtils.h>
 
 #include <Atom/RPI.Reflect/Material/MaterialAssetCreator.h>
 #include <Atom/RPI.Reflect/Material/MaterialPropertiesLayout.h>
@@ -126,7 +127,8 @@ namespace AZ
             return changesWereApplied ? ApplyVersionUpdatesResult::UpdatesApplied : ApplyVersionUpdatesResult::NoUpdates;
         }
 
-        Outcome<Data::Asset<MaterialAsset> > MaterialSourceData::CreateMaterialAsset(Data::AssetId assetId, AZStd::string_view materialSourceFilePath, bool elevateWarnings, bool includeMaterialPropertyNames) const
+        Outcome<Data::Asset<MaterialAsset>> MaterialSourceData::CreateMaterialAsset(
+            Data::AssetId assetId, AZStd::string_view materialSourceFilePath, bool elevateWarnings, bool includeMaterialPropertyNames) const
         {
             MaterialAssetCreator materialAssetCreator;
             materialAssetCreator.SetElevateWarnings(elevateWarnings);
@@ -172,66 +174,7 @@ namespace AZ
                 materialAssetCreator.Begin(assetId, *parentMaterialAsset.GetValue().Get(), includeMaterialPropertyNames);
             }
 
-            for (auto& group : m_properties)
-            {
-                for (auto& property : group.second)
-                {
-                    MaterialPropertyId propertyId{ group.first, property.first };
-                    if (!property.second.m_value.IsValid())
-                    {
-                        AZ_Warning("Material source data", false, "Source data for material property value is invalid.");
-                    }
-                    else
-                    {
-                        MaterialPropertyIndex propertyIndex = materialAssetCreator.m_materialPropertiesLayout->FindPropertyIndex(propertyId.GetFullName());
-                        if (propertyIndex.IsValid())
-                        {
-                            const MaterialPropertyDescriptor* propertyDescriptor = materialAssetCreator.m_materialPropertiesLayout->GetPropertyDescriptor(propertyIndex);
-                            switch (propertyDescriptor->GetDataType())
-                            {
-                            case MaterialPropertyDataType::Image:
-                            {
-                                Outcome<Data::Asset<ImageAsset>> imageAssetResult = MaterialUtils::GetImageAssetReference(materialSourceFilePath, property.second.m_value.GetValue<AZStd::string>());
-
-                                if (imageAssetResult.IsSuccess())
-                                {
-                                    auto& imageAsset = imageAssetResult.GetValue();
-                                    // Load referenced images when load material
-                                    imageAsset.SetAutoLoadBehavior(Data::AssetLoadBehavior::PreLoad);
-                                    materialAssetCreator.SetPropertyValue(propertyId.GetFullName(), imageAsset);
-                                }
-                                else
-                                {
-                                    materialAssetCreator.ReportError("Material property '%s': Could not find the image '%s'", propertyId.GetFullName().GetCStr(), property.second.m_value.GetValue<AZStd::string>().data());
-                                }
-                            }
-                            break;
-                            case MaterialPropertyDataType::Enum:
-                            {
-                                AZ::Name enumName = AZ::Name(property.second.m_value.GetValue<AZStd::string>());
-                                uint32_t enumValue = propertyDescriptor->GetEnumValue(enumName);
-                                if (enumValue == MaterialPropertyDescriptor::InvalidEnumValue)
-                                {
-                                    materialAssetCreator.ReportError("Enum value '%s' couldn't be found in the 'enumValues' list", enumName.GetCStr());
-                                }
-                                else
-                                {
-                                    materialAssetCreator.SetPropertyValue(propertyId.GetFullName(), enumValue);
-                                }
-                            }
-                            break;
-                            default:
-                                materialAssetCreator.SetPropertyValue(propertyId.GetFullName(), property.second.m_value);
-                                break;
-                            }
-                        }
-                        else
-                        {
-                            materialAssetCreator.ReportWarning("Can not find property id '%s' in MaterialPropertyLayout", propertyId.GetFullName().GetStringView().data());
-                        }
-                    }
-                }
-            }
+            ApplyPropertiesToAssetCreator(materialAssetCreator, materialSourceFilePath);
 
             Data::Asset<MaterialAsset> material;
             if (materialAssetCreator.End(material))
@@ -244,5 +187,183 @@ namespace AZ
             }
         }
 
+        Outcome<Data::Asset<MaterialAsset>> MaterialSourceData::CreateMaterialAssetFromSourceData(
+            Data::AssetId assetId,
+            AZStd::string_view materialSourceFilePath,
+            bool elevateWarnings,
+            bool includeMaterialPropertyNames,
+            AZStd::unordered_set<AZStd::string>* sourceDependencies) const
+        {
+            const auto materialTypeSourcePath = AssetUtils::ResolvePathReference(materialSourceFilePath, m_materialType);
+            const auto materialTypeAssetId = AssetUtils::MakeAssetId(materialTypeSourcePath, 0);
+            if (!materialTypeAssetId.IsSuccess())
+            {
+                AZ_Error("MaterialSourceData", false, "Failed to create material type asset ID: '%s'.", materialTypeSourcePath.c_str());
+                return Failure();
+            }
+
+            MaterialTypeSourceData materialTypeSourceData;
+            if (!AZ::RPI::JsonUtils::LoadObjectFromFile(materialTypeSourcePath, materialTypeSourceData))
+            {
+                AZ_Error("MaterialSourceData", false, "Failed to load MaterialTypeSourceData: '%s'.", materialTypeSourcePath.c_str());
+                return Failure();
+            }
+
+            materialTypeSourceData.ResolveUvEnums();
+
+            const auto materialTypeAsset =
+                materialTypeSourceData.CreateMaterialTypeAsset(materialTypeAssetId.GetValue(), materialTypeSourcePath, elevateWarnings);
+            if (!materialTypeAsset.IsSuccess())
+            {
+                AZ_Error("MaterialSourceData", false, "Failed to create material type asset from source data: '%s'.", materialTypeSourcePath.c_str());
+                return Failure();
+            }
+
+            // Track all of the material and material type assets loaded while trying to create a material asset from source data. This will
+            // be used for evaluating circular dependencies and returned for external monitoring or other use.
+            AZStd::unordered_set<AZStd::string> dependencies;
+            dependencies.insert(materialSourceFilePath);
+            dependencies.insert(materialTypeSourcePath);
+
+            // Load and build a stack of MaterialSourceData from all of the parent materials in the hierarchy. Properties from the source
+            // data will be applied in reverse to the asset creator.
+            AZStd::vector<MaterialSourceData> parentSourceDataStack;
+
+            AZStd::string parentSourceRelPath = m_parentMaterial;
+            AZStd::string parentSourceAbsPath = AssetUtils::ResolvePathReference(materialSourceFilePath, parentSourceRelPath);
+            while (!parentSourceRelPath.empty())
+            {
+                if (!dependencies.insert(parentSourceAbsPath).second)
+                {
+                    AZ_Error("MaterialSourceData", false, "Detected circular dependency between materials: '%s' and '%s'.", materialSourceFilePath.data(), parentSourceAbsPath.c_str());
+                    return Failure();
+                }
+
+                MaterialSourceData parentSourceData;
+                if (!AZ::RPI::JsonUtils::LoadObjectFromFile(parentSourceAbsPath, parentSourceData))
+                {
+                    AZ_Error("MaterialSourceData", false, "Failed to load MaterialSourceData for parent material: '%s'.", parentSourceAbsPath.c_str());
+                    return Failure();
+                }
+
+                // Make sure that all materials in the hierarchy share the same material type
+                const auto parentTypeAssetId = AssetUtils::MakeAssetId(parentSourceAbsPath, parentSourceData.m_materialType, 0);
+                if (!parentTypeAssetId)
+                {
+                    AZ_Error("MaterialSourceData", false, "Parent material asset ID wasn't found: '%s'.", parentSourceAbsPath.c_str());
+                    return Failure();
+                }
+
+                if (parentTypeAssetId.GetValue() != materialTypeAssetId.GetValue())
+                {
+                    AZ_Error("MaterialSourceData", false, "This material and its parent material do not share the same material type.");
+                    return Failure();
+                }
+
+                // Get the location of the next parent material and push the source data onto the stack 
+                parentSourceRelPath = parentSourceData.m_parentMaterial;
+                parentSourceAbsPath = AssetUtils::ResolvePathReference(parentSourceAbsPath, parentSourceRelPath);
+                parentSourceDataStack.emplace_back(AZStd::move(parentSourceData));
+            }
+
+            // Create the material asset from all the previously loaded source data 
+            MaterialAssetCreator materialAssetCreator;
+            materialAssetCreator.SetElevateWarnings(elevateWarnings);
+            materialAssetCreator.Begin(assetId, *materialTypeAsset.GetValue().Get(), includeMaterialPropertyNames);
+
+            while (!parentSourceDataStack.empty())
+            {
+                parentSourceDataStack.back().ApplyPropertiesToAssetCreator(materialAssetCreator, materialSourceFilePath);
+                parentSourceDataStack.pop_back();
+            }
+
+            ApplyPropertiesToAssetCreator(materialAssetCreator, materialSourceFilePath);
+
+            Data::Asset<MaterialAsset> material;
+            if (materialAssetCreator.End(material))
+            {
+                if (sourceDependencies)
+                {
+                    sourceDependencies->insert(dependencies.begin(), dependencies.end());
+                }
+
+                return Success(material);
+            }
+
+            return Failure();
+        }
+
+        void MaterialSourceData::ApplyPropertiesToAssetCreator(
+            AZ::RPI::MaterialAssetCreator& materialAssetCreator, const AZStd::string_view& materialSourceFilePath) const
+        {
+            for (auto& group : m_properties)
+            {
+                for (auto& property : group.second)
+                {
+                    MaterialPropertyId propertyId{ group.first, property.first };
+                    if (!property.second.m_value.IsValid())
+                    {
+                        AZ_Warning("Material source data", false, "Source data for material property value is invalid.");
+                    }
+                    else
+                    {
+                        MaterialPropertyIndex propertyIndex =
+                            materialAssetCreator.m_materialPropertiesLayout->FindPropertyIndex(propertyId.GetFullName());
+                        if (propertyIndex.IsValid())
+                        {
+                            const MaterialPropertyDescriptor* propertyDescriptor =
+                                materialAssetCreator.m_materialPropertiesLayout->GetPropertyDescriptor(propertyIndex);
+                            switch (propertyDescriptor->GetDataType())
+                            {
+                            case MaterialPropertyDataType::Image:
+                                {
+                                    Outcome<Data::Asset<ImageAsset>> imageAssetResult = MaterialUtils::GetImageAssetReference(
+                                        materialSourceFilePath, property.second.m_value.GetValue<AZStd::string>());
+
+                                    if (imageAssetResult.IsSuccess())
+                                    {
+                                        auto& imageAsset = imageAssetResult.GetValue();
+                                        // Load referenced images when load material
+                                        imageAsset.SetAutoLoadBehavior(Data::AssetLoadBehavior::PreLoad);
+                                        materialAssetCreator.SetPropertyValue(propertyId.GetFullName(), imageAsset);
+                                    }
+                                    else
+                                    {
+                                        materialAssetCreator.ReportError(
+                                            "Material property '%s': Could not find the image '%s'", propertyId.GetFullName().GetCStr(),
+                                            property.second.m_value.GetValue<AZStd::string>().data());
+                                    }
+                                }
+                                break;
+                            case MaterialPropertyDataType::Enum:
+                                {
+                                    AZ::Name enumName = AZ::Name(property.second.m_value.GetValue<AZStd::string>());
+                                    uint32_t enumValue = propertyDescriptor->GetEnumValue(enumName);
+                                    if (enumValue == MaterialPropertyDescriptor::InvalidEnumValue)
+                                    {
+                                        materialAssetCreator.ReportError(
+                                            "Enum value '%s' couldn't be found in the 'enumValues' list", enumName.GetCStr());
+                                    }
+                                    else
+                                    {
+                                        materialAssetCreator.SetPropertyValue(propertyId.GetFullName(), enumValue);
+                                    }
+                                }
+                                break;
+                            default:
+                                materialAssetCreator.SetPropertyValue(propertyId.GetFullName(), property.second.m_value);
+                                break;
+                            }
+                        }
+                        else
+                        {
+                            materialAssetCreator.ReportWarning(
+                                "Can not find property id '%s' in MaterialPropertyLayout", propertyId.GetFullName().GetStringView().data());
+                        }
+                    }
+                }
+            }
+        }
+
     } // namespace RPI
 } // namespace AZ
diff --git a/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/MaterialTypeSourceData.cpp b/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/MaterialTypeSourceData.cpp
index 08f57c7cd3..396ba71e14 100644
--- a/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/MaterialTypeSourceData.cpp
+++ b/Gems/Atom/RPI/Code/Source/RPI.Edit/Material/MaterialTypeSourceData.cpp
@@ -393,11 +393,12 @@ namespace AZ
             for (const ShaderVariantReferenceData& shaderRef : m_shaderCollection)
             {
                 const auto& shaderFile = shaderRef.m_shaderFilePath;
-                const auto& shaderAsset = AssetUtils::LoadAsset<ShaderAsset>(materialTypeSourceFilePath, shaderFile, 0);
+                auto shaderAssetResult = AssetUtils::LoadAsset<ShaderAsset>(materialTypeSourceFilePath, shaderFile, 0);
 
-                if (shaderAsset)
+                if (shaderAssetResult)
                 {
-                    auto optionsLayout = shaderAsset.GetValue()->GetShaderOptionGroupLayout();
+                    auto shaderAsset = shaderAssetResult.GetValue();
+                    auto optionsLayout = shaderAsset->GetShaderOptionGroupLayout();
                     ShaderOptionGroup options{ optionsLayout };
                     for (auto& iter : shaderRef.m_shaderOptionValues)
                     {
@@ -408,12 +409,11 @@ namespace AZ
                     }
 
                     materialTypeAssetCreator.AddShader(
-                        shaderAsset.GetValue(), options.GetShaderVariantId(),
-                        shaderRef.m_shaderTag.IsEmpty() ? Uuid::CreateRandom().ToString<AZ::Name>() : shaderRef.m_shaderTag
-                    );
+                        shaderAsset, options.GetShaderVariantId(),
+                        shaderRef.m_shaderTag.IsEmpty() ? Uuid::CreateRandom().ToString<AZ::Name>() : shaderRef.m_shaderTag);
 
                     // Gather UV names
-                    const ShaderInputContract& shaderInputContract = shaderAsset.GetValue()->GetInputContract();
+                    const ShaderInputContract& shaderInputContract = shaderAsset->GetInputContract();
                     for (const ShaderInputContract::StreamChannelInfo& channel : shaderInputContract.m_streamChannels)
                     {
                         const RHI::ShaderSemantic& semantic = channel.m_semantic;
@@ -493,15 +493,19 @@ namespace AZ
                         {
                         case MaterialPropertyDataType::Image:
                         {
-                            Outcome<Data::Asset<ImageAsset>> imageAssetResult = MaterialUtils::GetImageAssetReference(materialTypeSourceFilePath, property.m_value.GetValue<AZStd::string>());
+                            auto imageAssetResult = MaterialUtils::GetImageAssetReference(
+                                materialTypeSourceFilePath, property.m_value.GetValue<AZStd::string>());
 
-                            if (imageAssetResult.IsSuccess())
+                            if (imageAssetResult)
                             {
-                                materialTypeAssetCreator.SetPropertyValue(propertyId.GetFullName(), imageAssetResult.GetValue());
+                                auto imageAsset = imageAssetResult.GetValue();
+                                materialTypeAssetCreator.SetPropertyValue(propertyId.GetFullName(), imageAsset);
                             }
                             else
                             {
-                                materialTypeAssetCreator.ReportError("Material property '%s': Could not find the image '%s'", propertyId.GetFullName().GetCStr(), property.m_value.GetValue<AZStd::string>().data());
+                                materialTypeAssetCreator.ReportError(
+                                    "Material property '%s': Could not find the image '%s'", propertyId.GetFullName().GetCStr(),
+                                    property.m_value.GetValue<AZStd::string>().data());
                             }
                         }
                         break;
diff --git a/Gems/Atom/RPI/Code/Source/RPI.Reflect/Material/MaterialTypeAsset.cpp b/Gems/Atom/RPI/Code/Source/RPI.Reflect/Material/MaterialTypeAsset.cpp
index 76634201eb..48654d7769 100644
--- a/Gems/Atom/RPI/Code/Source/RPI.Reflect/Material/MaterialTypeAsset.cpp
+++ b/Gems/Atom/RPI/Code/Source/RPI.Reflect/Material/MaterialTypeAsset.cpp
@@ -188,6 +188,10 @@ namespace AZ
         void MaterialTypeAsset::SetReady()
         {
             m_status = AssetStatus::Ready;
+
+            // If this was created dynamically using MaterialTypeAssetCreator (which is what calls SetReady()),
+            // we need to connect to the AssetBus for reloads.
+            PostLoadInit();
         }
 
         bool MaterialTypeAsset::PostLoadInit()
diff --git a/Gems/Atom/RPI/Code/Source/RPI.Reflect/Material/ShaderCollection.cpp b/Gems/Atom/RPI/Code/Source/RPI.Reflect/Material/ShaderCollection.cpp
index 87076891dd..16813cb6b7 100644
--- a/Gems/Atom/RPI/Code/Source/RPI.Reflect/Material/ShaderCollection.cpp
+++ b/Gems/Atom/RPI/Code/Source/RPI.Reflect/Material/ShaderCollection.cpp
@@ -126,8 +126,8 @@ namespace AZ
         }
 
         ShaderCollection::Item::Item()
+            : m_renderStatesOverlay(RHI::GetInvalidRenderStates())
         {
-            m_renderStatesOverlay = RHI::GetInvalidRenderStates();
         }
 
         ShaderCollection::Item& ShaderCollection::operator[](size_t i)
@@ -156,7 +156,8 @@ namespace AZ
         }
 
         ShaderCollection::Item::Item(const Data::Asset<ShaderAsset>& shaderAsset, const AZ::Name& shaderTag, ShaderVariantId variantId)
-            : m_shaderAsset(shaderAsset)
+            : m_renderStatesOverlay(RHI::GetInvalidRenderStates())
+            , m_shaderAsset(shaderAsset)
             , m_shaderVariantId(variantId)
             , m_shaderTag(shaderTag)
             , m_shaderOptionGroup(shaderAsset->GetShaderOptionGroupLayout(), variantId)
@@ -164,7 +165,8 @@ namespace AZ
         }
 
         ShaderCollection::Item::Item(Data::Asset<ShaderAsset>&& shaderAsset, const AZ::Name& shaderTag, ShaderVariantId variantId)
-            : m_shaderAsset(AZStd::move(shaderAsset))
+            : m_renderStatesOverlay(RHI::GetInvalidRenderStates())
+            , m_shaderAsset(AZStd::move(shaderAsset))
             , m_shaderVariantId(variantId)
             , m_shaderTag(shaderTag)
             , m_shaderOptionGroup(shaderAsset->GetShaderOptionGroupLayout(), variantId)
diff --git a/Gems/Atom/Tools/AtomToolsFramework/Code/Source/Document/AtomToolsDocumentSystemComponent.cpp b/Gems/Atom/Tools/AtomToolsFramework/Code/Source/Document/AtomToolsDocumentSystemComponent.cpp
index 5652e9fe23..00de2a7c4c 100644
--- a/Gems/Atom/Tools/AtomToolsFramework/Code/Source/Document/AtomToolsDocumentSystemComponent.cpp
+++ b/Gems/Atom/Tools/AtomToolsFramework/Code/Source/Document/AtomToolsDocumentSystemComponent.cpp
@@ -159,7 +159,7 @@ namespace AtomToolsFramework
 
     void AtomToolsDocumentSystemComponent::OnDocumentExternallyModified(const AZ::Uuid& documentId)
     {
-        m_documentIdsToReopen.insert(documentId);
+        m_documentIdsWithExternalChanges.insert(documentId);
         if (!AZ::TickBus::Handler::BusIsConnected())
         {
             AZ::TickBus::Handler::BusConnect();
@@ -168,7 +168,7 @@ namespace AtomToolsFramework
 
     void AtomToolsDocumentSystemComponent::OnDocumentDependencyModified(const AZ::Uuid& documentId)
     {
-        m_documentIdsToReopen.insert(documentId);
+        m_documentIdsWithDependencyChanges.insert(documentId);
         if (!AZ::TickBus::Handler::BusIsConnected())
         {
             AZ::TickBus::Handler::BusConnect();
@@ -177,7 +177,7 @@ namespace AtomToolsFramework
 
     void AtomToolsDocumentSystemComponent::OnTick([[maybe_unused]] float deltaTime, [[maybe_unused]] AZ::ScriptTimePoint time)
     {
-        for (const AZ::Uuid& documentId : m_documentIdsToReopen)
+        for (const AZ::Uuid& documentId : m_documentIdsWithExternalChanges)
         {
             AZStd::string documentPath;
             AtomToolsDocumentRequestBus::EventResult(documentPath, documentId, &AtomToolsDocumentRequestBus::Events::GetAbsolutePath);
@@ -191,6 +191,8 @@ namespace AtomToolsFramework
                 continue;
             }
 
+            m_documentIdsWithDependencyChanges.erase(documentId);
+
             AtomToolsFramework::TraceRecorder traceRecorder(m_maxMessageBoxLineCount);
 
             bool openResult = false;
@@ -204,7 +206,7 @@ namespace AtomToolsFramework
             }
         }
 
-        for (const AZ::Uuid& documentId : m_documentIdsToReopen)
+        for (const AZ::Uuid& documentId : m_documentIdsWithDependencyChanges)
         {
             AZStd::string documentPath;
             AtomToolsDocumentRequestBus::EventResult(documentPath, documentId, &AtomToolsDocumentRequestBus::Events::GetAbsolutePath);
@@ -231,8 +233,8 @@ namespace AtomToolsFramework
             }
         }
 
-        m_documentIdsToReopen.clear();
-        m_documentIdsToReopen.clear();
+        m_documentIdsWithDependencyChanges.clear();
+        m_documentIdsWithExternalChanges.clear();
         AZ::TickBus::Handler::BusDisconnect();
     }
 
diff --git a/Gems/Atom/Tools/AtomToolsFramework/Code/Source/Document/AtomToolsDocumentSystemComponent.h b/Gems/Atom/Tools/AtomToolsFramework/Code/Source/Document/AtomToolsDocumentSystemComponent.h
index 9c556a07e7..a0f5eb085d 100644
--- a/Gems/Atom/Tools/AtomToolsFramework/Code/Source/Document/AtomToolsDocumentSystemComponent.h
+++ b/Gems/Atom/Tools/AtomToolsFramework/Code/Source/Document/AtomToolsDocumentSystemComponent.h
@@ -85,8 +85,8 @@ namespace AtomToolsFramework
         AZStd::intrusive_ptr<AtomToolsDocumentSystemSettings> m_settings;
         AZStd::function<AtomToolsDocument*()> m_documentCreator;
         AZStd::unordered_map<AZ::Uuid, AZStd::shared_ptr<AtomToolsDocument>> m_documentMap;
-        AZStd::unordered_set<AZ::Uuid> m_documentIdsToRebuild;
-        AZStd::unordered_set<AZ::Uuid> m_documentIdsToReopen;
+        AZStd::unordered_set<AZ::Uuid> m_documentIdsWithExternalChanges;
+        AZStd::unordered_set<AZ::Uuid> m_documentIdsWithDependencyChanges;
         const size_t m_maxMessageBoxLineCount = 15;
     };
 } // namespace AtomToolsFramework
diff --git a/Gems/Atom/Tools/MaterialEditor/Code/Source/Document/MaterialDocument.cpp b/Gems/Atom/Tools/MaterialEditor/Code/Source/Document/MaterialDocument.cpp
index 98af749261..ee58cbea3e 100644
--- a/Gems/Atom/Tools/MaterialEditor/Code/Source/Document/MaterialDocument.cpp
+++ b/Gems/Atom/Tools/MaterialEditor/Code/Source/Document/MaterialDocument.cpp
@@ -567,26 +567,26 @@ namespace MaterialEditor
         }
     }
 
-    void MaterialDocument::SourceFileChanged(AZStd::string relativePath, AZStd::string scanFolder, AZ::Uuid sourceUUID)
+    void MaterialDocument::SourceFileChanged(AZStd::string relativePath, AZStd::string scanFolder, [[maybe_unused]] AZ::Uuid sourceUUID)
     {
-        if (m_sourceAssetId.m_guid == sourceUUID)
+        auto sourcePath = AZ::RPI::AssetUtils::ResolvePathReference(scanFolder, relativePath);
+
+        if (m_absolutePath == sourcePath)
         {
             // ignore notifications caused by saving the open document
             if (!m_saveTriggeredInternally)
             {
                 AZ_TracePrintf("MaterialDocument", "Material document changed externally: '%s'.\n", m_absolutePath.c_str());
-                AtomToolsFramework::AtomToolsDocumentNotificationBus::Broadcast(&AtomToolsFramework::AtomToolsDocumentNotificationBus::Events::OnDocumentExternallyModified, m_id);
+                AtomToolsFramework::AtomToolsDocumentNotificationBus::Broadcast(
+                    &AtomToolsFramework::AtomToolsDocumentNotificationBus::Events::OnDocumentExternallyModified, m_id);
             }
             m_saveTriggeredInternally = false;
         }
-    }
-
-    void MaterialDocument::OnAssetReloaded(AZ::Data::Asset<AZ::Data::AssetData> asset)
-    {
-        if (m_dependentAssetIds.find(asset->GetId()) != m_dependentAssetIds.end())
+        else if (m_sourceDependencies.find(sourcePath) != m_sourceDependencies.end())
         {
             AZ_TracePrintf("MaterialDocument", "Material document dependency changed: '%s'.\n", m_absolutePath.c_str());
-            AtomToolsFramework::AtomToolsDocumentNotificationBus::Broadcast(&AtomToolsFramework::AtomToolsDocumentNotificationBus::Events::OnDocumentDependencyModified, m_id);
+            AtomToolsFramework::AtomToolsDocumentNotificationBus::Broadcast(
+                &AtomToolsFramework::AtomToolsDocumentNotificationBus::Events::OnDocumentDependencyModified, m_id);
         }
     }
 
@@ -655,7 +655,6 @@ namespace MaterialEditor
             return false;
         }
 
-        m_sourceAssetId = sourceAssetInfo.m_assetId;
         m_relativePath = sourceAssetInfo.m_relativePath;
         if (!AzFramework::StringFunc::Path::Normalize(m_relativePath))
         {
@@ -722,14 +721,15 @@ namespace MaterialEditor
         // we can create the asset dynamically from the source data.
         // Long term, the material document should not be concerned with assets at all. The viewport window should be the
         // only thing concerned with assets or instances.
-        auto createResult = m_materialSourceData.CreateMaterialAsset(Uuid::CreateRandom(), m_absolutePath, true);
-        if (!createResult)
+        auto materialAssetResult =
+            m_materialSourceData.CreateMaterialAssetFromSourceData(Uuid::CreateRandom(), m_absolutePath, true, true, &m_sourceDependencies);
+        if (!materialAssetResult)
         {
             AZ_Error("MaterialDocument", false, "Material asset could not be created from source data: '%s'.", m_absolutePath.c_str());
             return false;
         }
 
-        m_materialAsset = createResult.GetValue();
+        m_materialAsset = materialAssetResult.GetValue();
         if (!m_materialAsset.IsReady())
         {
             AZ_Error("MaterialDocument", false, "Material asset is not ready: '%s'.", m_absolutePath.c_str());
@@ -743,28 +743,35 @@ namespace MaterialEditor
             return false;
         }
 
-        // track material type asset to notify when dependencies change
-        m_dependentAssetIds.insert(materialTypeAsset->GetId());
-        AZ::Data::AssetBus::MultiHandler::BusConnect(materialTypeAsset->GetId());
-
         AZStd::array_view<AZ::RPI::MaterialPropertyValue> parentPropertyValues = materialTypeAsset->GetDefaultPropertyValues();
         AZ::Data::Asset<MaterialAsset> parentMaterialAsset;
         if (!m_materialSourceData.m_parentMaterial.empty())
         {
-            // There is a parent for this material
-            auto parentMaterialResult = AssetUtils::LoadAsset<MaterialAsset>(m_absolutePath, m_materialSourceData.m_parentMaterial);
-            if (!parentMaterialResult)
+            AZ::RPI::MaterialSourceData parentMaterialSourceData;
+            const auto parentMaterialFilePath = AssetUtils::ResolvePathReference(m_absolutePath, m_materialSourceData.m_parentMaterial);
+            if (!AZ::RPI::JsonUtils::LoadObjectFromFile(parentMaterialFilePath, parentMaterialSourceData))
             {
-                AZ_Error("MaterialDocument", false, "Parent material asset could not be loaded: '%s'.", m_materialSourceData.m_parentMaterial.c_str());
+                AZ_Error("MaterialDocument", false, "Material parent source data could not be loaded for: '%s'.", parentMaterialFilePath.c_str());
                 return false;
             }
 
-            parentMaterialAsset = parentMaterialResult.GetValue();
-            parentPropertyValues = parentMaterialAsset->GetPropertyValues();
+            const auto parentMaterialAssetIdResult = AssetUtils::MakeAssetId(parentMaterialFilePath, 0);
+            if (!parentMaterialAssetIdResult)
+            {
+                AZ_Error("MaterialDocument", false, "Material parent asset ID could not be created: '%s'.", parentMaterialFilePath.c_str());
+                return false;
+            }
 
-            // track parent material asset to notify when dependencies change
-            m_dependentAssetIds.insert(parentMaterialAsset->GetId());
-            AZ::Data::AssetBus::MultiHandler::BusConnect(parentMaterialAsset->GetId());
+            auto parentMaterialAssetResult = parentMaterialSourceData.CreateMaterialAssetFromSourceData(
+                parentMaterialAssetIdResult.GetValue(), parentMaterialFilePath, true, true);
+            if (!parentMaterialAssetResult)
+            {
+                AZ_Error("MaterialDocument", false, "Material parent asset could not be created from source data: '%s'.", parentMaterialFilePath.c_str());
+                return false;
+            }
+
+            parentMaterialAsset = parentMaterialAssetResult.GetValue();
+            parentPropertyValues = parentMaterialAsset->GetPropertyValues();
         }
 
         // Creating a material from a material asset will fail if a texture is referenced but not loaded 
@@ -913,15 +920,13 @@ namespace MaterialEditor
     void MaterialDocument::Clear()
     {
         AZ::TickBus::Handler::BusDisconnect();
-        AZ::Data::AssetBus::MultiHandler::BusDisconnect();
         AzToolsFramework::AssetSystemBus::Handler::BusDisconnect();
 
         m_materialAsset = {};
         m_materialInstance = {};
         m_absolutePath.clear();
         m_relativePath.clear();
-        m_sourceAssetId = {};
-        m_dependentAssetIds.clear();
+        m_sourceDependencies.clear();
         m_saveTriggeredInternally = {};
         m_compilePending = {};
         m_properties.clear();
diff --git a/Gems/Atom/Tools/MaterialEditor/Code/Source/Document/MaterialDocument.h b/Gems/Atom/Tools/MaterialEditor/Code/Source/Document/MaterialDocument.h
index 03997a2a91..452111f99a 100644
--- a/Gems/Atom/Tools/MaterialEditor/Code/Source/Document/MaterialDocument.h
+++ b/Gems/Atom/Tools/MaterialEditor/Code/Source/Document/MaterialDocument.h
@@ -29,7 +29,6 @@ namespace MaterialEditor
         : public AtomToolsFramework::AtomToolsDocument
         , public MaterialDocumentRequestBus::Handler
         , private AZ::TickBus::Handler
-        , private AZ::Data::AssetBus::MultiHandler
         , private AzToolsFramework::AssetSystemBus::Handler
     {
     public:
@@ -105,11 +104,6 @@ namespace MaterialEditor
         void SourceFileChanged(AZStd::string relativePath, AZStd::string scanFolder, AZ::Uuid sourceUUID) override;
         //////////////////////////////////////////////////////////////////////////
 
-        //////////////////////////////////////////////////////////////////////////
-        // AZ::Data::AssetBus::Router overrides...
-        void OnAssetReloaded(AZ::Data::Asset<AZ::Data::AssetData> asset) override;
-        //////////////////////////////////////////////////////////////////////////
-
         bool SavePropertiesToSourceData(AZ::RPI::MaterialSourceData& sourceData, PropertyFilterFunction propertyFilter) const;
 
         bool OpenInternal(AZStd::string_view loadPath);
@@ -137,11 +131,8 @@ namespace MaterialEditor
         // Material instance being edited
         AZ::Data::Instance<AZ::RPI::Material> m_materialInstance;
 
-        // Asset used to open document
-        AZ::Data::AssetId m_sourceAssetId;
-
         // Set of assets that can trigger a document reload
-        AZStd::unordered_set<AZ::Data::AssetId> m_dependentAssetIds;
+        AZStd::unordered_set<AZStd::string> m_sourceDependencies;
 
         // Track if document saved itself last to skip external modification notification
         bool m_saveTriggeredInternally = false;