In 2023, the S&P 500 delivered a 24% return, followed by a 23% return in 2024. As 2025 comes to a close, investors are on track to snap up another 16%. But after three strong years…  will the music keep playing?

Investors have reason to be cautious. Consider that the back-to-back S&P 500 gains of more than 20% in 2023 and 2024 haven’t happened since the late 1990s.

Investors, however, can broaden their allocations beyond the S&P 500. 

Three sectors, in particular, look good heading into next year. A combination of attractive PEs, strong EPS, and reduced uncertainty all bode well for these sectors. 

But first...

What Happened in the Markets This Week?

📱 TikTok’s future in the US is still unresolved ( BBC )

• TikTok still faces a January 2026 deadline to be sold or banned in the US, with no approved transaction in place.
• Potential buyers are ready, but approval from ByteDance and Chinese authorities remains uncertain.
• US policymakers continue to frame the issue around national security and data sovereignty.
• Any deal would likely require separating TikTok from its core recommendation algorithm – a major operational risk.
• For investors, TikTok is less a tech story and more a geopolitical one.
• Expect volatility in sentiment around US social media names as deadlines approach.

🎬 Warner Bros rejects Paramount and sticks with Netflix ( CNN )

• Warner Bros. Discovery has rejected Paramount’s hostile takeover bid and confirmed it will move ahead with its deal with Netflix.
• The board said Netflix’s offer provides more certainty, despite Paramount’s higher headline valuation.
• Warner Bros raised concerns about Paramount’s complex financing and heavier regulatory risk.
• Netflix pitched its deal as cleaner, faster and easier to close, even as critics warn about industry concentration.
• For investors, this shows that deal certainty now matters more than headline price in mega M&A.
• Regulatory approval is now the biggest remaining hurdle.

🇯🇵 Japan moves closer to “normal” rates for the first time in decades ( CNA )

• The Bank of Japan is expected to raise rates to 0.75%, the highest level in nearly 30 years.
• While modest by global standards, the move reinforces that Japan’s era of ultra-easy policy is ending.
• Markets are focused less on this hike and more on the pace of future increases toward neutral rates.
• Higher Japanese yields could unwind global carry trades and support a stronger yen.
• For investors, Japan is shifting from a funding source to a potential volatility driver.
• FX and bond markets will be the first place these effects show up.

👟 Elliott takes aim at Lululemon with US$1B stake and CEO pressure ( CNBC )

• Activist investor Elliott has built a stake of more than US$1B in Lululemon and is pushing for a new CEO after the company confirmed its current boss will step down in January.
• Lululemon has struggled over the past year as competition heats up from newer athleisure brands like Vuori and Alo Yoga.
• Elliott’s involvement signals frustration with the company’s recent performance and strategy.
• A leadership change could help sharpen execution and reignite growth but it also brings uncertainty.
• For investors, this is a familiar activist setup: upside if change works quickly, volatility if it doesn’t.
• The CEO search is now the key catalyst to watch.

📈 Three Sectors Expected to Rally in 2026

💸 Financials: High Estimated Earnings and a Relatively Low PE

Analysts have a positive outlook for the financial sector in 2026. But before we look at their estimates, let’s look at what the market expects.

✨ What the Market Expects from the Financial Sector

To gauge market expectations, we need to examine the difference between the sector's price return and the change in its price-to-forward-earnings multiple. This approach helps reveal the potential for upside value. 

For example, if a sector is up 6% for the year and its price/forward earnings multiple has increased by 2%, then it’s safe to assume that the market has revised its estimate of the sector’s earnings power higher by 4%.

Using this analysis, the financial sector stands out as the industry with the most significant multiple contraction (-3%) among all sectors in the S&P 500 this year , while generating a YTD return of about 11% . These numbers suggest that the industry will have strong earnings in the near term.

Additionally, recent FactSet data support an optimistic outlook for the financial sector. In their early December Earnings Insight, they explain that  “The Financials sector has recorded the second-largest percentage increase in estimated (dollar-level) earnings of all eleven sectors since the start of the [fourth] quarter.”

They continue, “as a result, the estimated (year-over-year) earnings growth rate for this sector has increased to 6.2% today from 4.1% on September 30.”

🔎 What Analysts Expect from the Financial Sector for 2026

Analysts, like the market, are optimistic.

➡️ J.P. Morgan:

J.P. Morgan forecasts that the financial sector will benefit from AI, which will “broaden out from the innovators (tech) to the enablers…and the adopters (financials, health care).” In the same report, the analysts explain that “financials boast resilient earnings and differentiated catalysts like deregulation and yield curve steepening.”

➡️ Morgan Stanley:

This outlook is not limited to just US equities. Within European equities, the financial sector has become a larger contributor to EPS growth within MSCI Europe as fiscal spending rises.

As Morgan Stanley explains, “We have seen a shift in sector leadership within European equities. We believe this change will remain a feature into 2026, as it reflects efforts to revive the industrial base and reduce dependence on external demand.”

🚧 Potential Risks

⚠️ Shadow banking & private credit pressures

Expansion of less-regulated credit providers might raise concerns about systemic risk, liquidity, and opaque exposures. The recent high-profile failures of First Brands and Tricolor, which we discussed earlier , highlight the less-visible risks in the private credit market.

🚨 Fiscal policy uncertainty

Uncertainty in monetary and fiscal policy (e.g., interest rate shifts, Fed actions) could strain markets and financial planning. An annual survey from The Depository Trust & Clearing Corporation (DTCC) found that economic policy uncertainty was one of the top five risks that financial professionals cited in their 2026 outlook.

💻 Technology: Strong Performance to Continue Amid Supportive Policy

While the powerhouse performance of technology YTD (26%) looks fragile, there are good reasons to bet on the sector in 2026.

🔮 What the Market Expects from the Tech Sector

The tech sector's forward PE is essentially unchanged YTD. This consistency is in contrast to many of the headlines warning how “overvalued” the sector has become. The difference between the decline in forward PE and the rising share price suggests high expectations for future earnings. 

In Q4 of this year, only three of the 11 sectors saw an increase in their bottom-up EPS estimates. The tech sector was at the top of this short list with a 4.5% increase. The industry is also at the top of the list for 2026, with estimated EPS growth of 5.8%, according to the same FactSet data.

📶 What Analysts Expect from the Tech Sector

A round-up of analysts' estimates presents an encouraging outlook:

• Analysts are most optimistic about the semiconductor industry, expecting annual earnings growth of 26% over the next 5 years.
• This is better than its past earnings growth rate of 3.3% per year.

• In contrast, the Technology Hardware industry is expected to see its earnings grow by 8.9% per year over the next few years.

➡️ BlackRock:

BlackRock’s 2026 Global Outlook has high expectations for technology in the coming year. In their report, they explain that  “As AI becomes embedded in the economy, we expect it to create entirely new pools of revenue in the tech sector and beyond,” giving technology’s recent performance the room to run in 2026 and beyond.

➡️ UBS:

In early December, UBS said it believes the “US tech sector is likely to remain a key driver for the market's next leg up.” The basis for this outlook is that there is a “genuine demand for AI-related products and services, and monetization continues to show encouraging improvements.” 

Some of the tailwinds for the sector include continued Federal Reserve easing, growing optimism about the global economy, and an expected decline in policy uncertainty over trade. 

🚧 Potential Risks

❗ROI pressures on AI investment

Heavy spending on AI infrastructure without clear revenue payoffs could weaken financial performance and valuations. AI demands an enormous amount of power and meeting those needs will present challenges. Research from Goldman Sachs found that “In the US, the weighting of power demand from data centers in the overall will increase even more, likely more than doubling by 2030 from 4% in 2023.”

☠️ Macroeconomic headwinds

Slower global growth, tightening credit conditions, and inflation may dampen tech spending and investment. Consider that the UN Trade and Development (UNCTAD) has forecasted that the world economy will expand by just 2.6% in 2025 and 2026, down from 2.9% in 2024.

🩺 Healthcare: Underperformance Finally Flips

The healthcare sector has underperformed the S&P 500 by a wide margin over the last 2.5 years. While the broader market increased by about 87% since 2020, the healthcare sector has delivered only 27%.

During that time, COVID put pressure on earnings, and policy uncertainty surrounding drug pricing posed hurdles for the sector. However, several changes could strongly support the industry in 2026.

👀 What the Market Expects from the Healthcare Industry

When comparing price-to-book ratios to expected return on equity, most healthcare sectors are cheap. This metric might suggest that investors who get into this sector now will benefit from relatively low prices.

The same body of research shows that the healthcare sector has not traded at a premium to the S&P 500 since the early 2000s. If the industry stages a comeback, investors who get in now could benefit from a great entry point. 

Let’s look at what the analysts expect.

✨ What Analysts Expect from the Healthcare Industry

Some analysts believe that many of the headwinds slowing growth in the healthcare sector are starting to dissipate. Clarity around the current administration's drug pricing policy, recent strong earnings, and growth via M&A activity are all creating momentum in the sector.

➡️ J.P. Morgan

J.P. Morgan has turned positive on the sector for several reasons. First, the most burdensome parts of the Trump administration’s “most favored nation” drug pricing initiative seem to be improving. The policy aimed to bring U.S. drug prices down to levels seen in other developed countries. Recently, Pfizer reached a deal with the government that primarily allows it to preserve its revenues.

Additionally, J.P. Morgan explains that the earnings picture is improving because “healthcare companies have beaten 3Q estimates by 13%—well above the broad market’s 7%, and the highest beat rate in at least two years.”

Lastly, M&A activity is picking up. In the healthcare sector, biotech is seeing a flurry of activity, averaging one deal per week since Labor Day.

➡️ Deloitte

Analysts at Deloitte believe that the healthcare sector could be a strong beneficiary of AI. Their research shows that  “About 70% of non-US health system executives expect operating revenue and margins to increase next year, while over 50% predict that operating costs will be flat or decline slightly.”

AI is expected to help by standardizing and automating workflows, offering predictive analytics, and risk stratification. 

🚧 Potential Risks

🤒 Healthcare policy shifts

Changes in Medicaid, Medicare, and employer-sponsored insurance policy could have ripple effects on access, reimbursement, and hospital viability. The recent "One Big Beautiful Bill" (OBBB) will cut Medicaid spending by an estimated $1.02 trillion to offset tax cuts.

🩼 Rising healthcare costs

Medical costs which include labor, supplies, drugs, and technology, could increase, straining provider margins and insurer pricing strategies. Research from PwC showed that “70% of surveyed health plans restated trends as higher than expected.”

💡 The Insight: Sector Specific Plays Could Matter in a Fragilized Equities Market

AI has powered the stock market since 2022. This trend could continue through 2026 and beyond. However, investors can be strategic about diversification by allocating to sectors with strong fundamentals. 

Financials are poised to perform as AI capex buildout creates demand for banking services. Simultaneously, the sector could benefit from the increased digitization of assets and financial services. 

The technology sector, despite the worries about high valuations and circular deals, still offers investors reasons to be optimistic. Strong EPS performance and a drop in forward PE suggest this area of the market warrants inclusion in a portfolio.

Finally, after years of underperformance, the healthcare sector is well positioned to leverage AI to drive efficiencies and reduce costs. Meanwhile, policy changes from the current administration have removed barriers to profitability.

How These Sectors Could Influence Portfolio Construction

Sectors will always rise and fall in performance. Timing those movements is impossible and expensive. For most investors, the best strategy is to identify the sectors that have strong fundamentals and future prospects despite price movements that are muted or down.  

This approach is especially important given that the uncertainty around AI is likely to keep volatility elevated. With a careful allocation to key sectors, investors have an opportunity to withstand or even benefit from that volatility.

Within each of these three sectors, investors can focus on the specific areas that are most promising.

Key Events Next Week

Monday

• 🇬🇧 UK GDP Growth Rate YoY (Q3)
  • 📉 Previous : 1.3%
  • ➡️ Why it matters : Weak UK growth keeps recession risks in play and strengthens the case for eventual Bank of England rate cuts – supportive for equities, but a headwind for the pound.

Tuesday

• 🇺🇸 US Durable Goods Orders MoM (Oct)
  • 📉 Forecast : -0.3%, Previous : 0.5%
  • ➡️ Why it matters : Durable goods capture business investment momentum. A pullback would suggest cooling demand, reinforcing expectations for Fed rate cuts next year.
• 🇺🇸 US GDP Growth Rate QoQ (Q3, 2nd Estimate)
  • 📈 Forecast : 3.2%, Previous : 3.8%
  • ➡️ Why it matters : This release shows whether US growth is slowing enough to justify easier policy. A downward revision would support the “soft landing” narrative and be equity-friendly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Stella and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.