2026 Sector Playbook: 3 Sectors Trading Below Fair Value

Key Points

• Sector rotation into financials, industrials, and utilities could continue in early 2026 if crowded growth trades cool off.
• Sector ETFs can work, but stock selection may offer better value where forward valuations sit below sector norms.
• Rate expectations, capex trends, and data center power demand are three practical catalysts to watch across these sectors.

As we kick off 2026, it's likely the sector rotation that began in December 2025 will continue. Some investors believe that many of the best-performing stocks of 2025, notably artificial intelligence (AI) stocks, are simply overvalued.

This belief extends beyond concerns about an AI bubble and falls into the category of value for the price. Many growth-oriented technology stocks simply feel overvalued and may require a correction before their valuations become attractive again.

As investors rotate out of the tech sector, they’ll look for stocks in sectors that may be trading below fair value. Three of the key sectors to consider are financials, industrials, and utilities.

This has been a stock picker’s market, so there have been some names in these sectors that have performed well. Many investors may choose to keep riding the hot hand into 2026.

But there are other names that are still trading at attractive valuations to their sector and the broader market. By focusing on individual names, investors have the opportunity to outperform some of the leading ETFs in the sector.

Financials: Lower Rates Could Unlock Undervalued Bank Stocks in 2026

Finance stocks are expected to do well in 2026, no matter which direction interest rates go. However, with the scale heavily tilting to at least one rate cut in the first half of 2026, this could be an attractive sector. The overarching theme is that lower interest rates will stimulate the economy, which is more supportive of bank earnings.

One option is to buy the Financial Select Sector SPDR Fund NYSEARCA: XLF. The fund was up approximately 13% in 2025, lagging the S&P 500. The fund provides exposure to some best-in-class stocks like JPMorgan Chase & Co. NYSE: JPM and Berkshire Hathaway NYSE: BRK.B.

However, these stocks are trading at or slightly above the sector’s forward price-to-earnings (P/E) ratio of 16.5. A different option may be to invest in undervalued sector stocks, including Bank of America NYSE: BAC, Capital One Financial Corp. NYSE: COF, and PNC Financial Group Inc. NYSE: PNC.

Industrials: Capex Revival and Infrastructure Demand Point to Upside

Industrial stocks were one of the hottest sectors in the first half of the year. But the sector has leveled off in the back half, and that’s observed in the stock chart for the Industrial Select Sector SPDR Fund NYSEARCA: XLI.

Industrials are expected to have another strong year in 2026 as infrastructure demand of all types is likely to get a boost if lower rates spur capital expenditures.

The XLI ETF is up about 18%, which closely approximates the performance of the S&P 500. Many of the top holdings in the fund are overvalued compared to the sector P/E average of around 24x, which is above the S&P average.

However, there is still some value to be found with names like Boeing Co. NYSE: BA, Union Pacific Corp. NYSE: UNP, and Honeywell Intl. NASDAQ: HON that all trade at a forward P/E ratio below the sector average.

Utilities: A Quiet Value Play Powered by Data Center Energy Needs

The utilities sector is another place to unlock value in 2026. That could lead you to the Utilities Select Sector SPDR Fund NYSEARCA: XLU. The ETF finished 2025 up around 13%, below the broader market. However, that was largely due to a 5.5% pullback in the last month of the year.

Utilities stocks are expected to benefit from increased demand from data centers, as well as the need to update aging electric infrastructure.

The sector has an average P/E ratio of around 18x. Some names currently trade at a value to that number, including Exelon Corp. NASDAQ: EXC, Pacific Gas &  Electric NYSE: PCG, and Algonquin Power & Utilities Corp. NYSE: AQN.