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In our Policy Engine, released last month, we highlighted several sectors that are currently rated neutral (essentially guidance to be at a market weight) that we believe may be poised for strong performance in 2026. We maintain a positive view of communication services as 2026 begins (the top-performing sector of 2024 and 2025) and continues to monitor technical analysis signals for any potential worrisome signs that suggest that sector may be getting fatigued after leading this bull market since October 2022.
Here are three sectors we have been neutral on recently and believe that they may be poised for an upgrade:
Healthcare
Healthcare remains firmly on our radar for a potential upgrade in early 2026, as it stands to benefit if the market rally broadens. Policy headwinds around drug pricing, the Affordable Care Act, and tariffs have largely cleared, while valuations remain compelling. If the tariffs established under the International Emergency Economic Powers Act (IEEPA) are ruled illegal, which could happen as soon as tomorrow, tariffs paid by healthcare companies (any many other importers) could be rebated — at least until new tariffs can be re-established under a new legal authority. This development could be a short-term positive for the sector.
Another policy development to watch is the Affordable Care Act (ACA) subsidies that were at the center of the government shutdown last fall. A compromise that extends the subsidies could help insurers, hospitals, and other medical facilities.
Relative performance has improved since September 2025, as shown in the accompanying chart, making healthcare a more attractive potential upgrade candidate on a technical analysis basis. The sector remains attractively valued, as it has been for quite some time. Healthcare stocks tend to perform best when the market favors defensive areas of the market, so a rotation away from the more economically sensitive sectors, should it occur, could potentially boost healthcare’s relative performance.
Healthcare Has Been a Relative Outperformer Since September
Source: LPL Research, FactSet 01/07/26
Industrials
Industrials is another neutral sector that may be set up well for a potential upgrade in the near term. The sector is a beneficiary of fiscal stimulus and the AI buildout, which together are expected to drive all of the growth in GDP in 2026 (about 2% based on consensus). More specifically, stimulus passed in the One Big Beautiful Bill Act (OBBBA) is estimated to amount to about $130 billion in business tax cuts expected to benefit manufacturing and research and development intensive businesses in 2026, many of them in the industrials sector (and technology too, more on that below). A similar amount of consumer tax cuts and other consumer stimulus totaling about $135 billion is expected to hit in 2026, according to data from Evercore ISI’s policy research team.
In addition, the roughly half a trillion in capital investments that AI hyperscalers are expected to make in 2026 amounts to more than 1% of GDP. Some of those dollars will go to the industrials sector to build data centers, providing a fundamental tailwind for the sector.
The sector is also positioned to benefit from defense spending. In fact, President Trump has called for a 50% increase in defense spending to $1.5 trillion in 2027, funded by tariffs. That’s too big of a number to get 60 votes in the Senate, but it suggests the trajectory is higher.
Our list of concerns is a short one. We would like to see relative strength improve before considering an upgrade, and valuations are not particularly attractive at a forward price-to-earnings ratio (P/E) of about 25.
We Would Like To See Better Relative Performance From Industrials
Source: LPL Research, FactSet 01/07/26
Technology
Our last neutral sector that may be poised for an upgrade is technology. At 35% of the S&P 500, a market weight position offers plenty of exposure. And with such strong performance in recent years, it’s natural to be a bit cautious on the sector this far into a bull market. At the same time, market-leading earnings growth on massive AI investment makes the sector a tempting upgrade.
Recent underperformance offers a more attractive entry point, while valuations are actually reasonable when strong earnings are considered. In fact, based on consensus earnings forecasts from FactSet for 2026, the technology sector has the lowest P/E to growth ratio of all sectors. The sector’s price-to-earnings ratio on 2026 estimates is high near 27, but the sector is expected to grow earnings by a similar amount (+28.3%) this year. So, while the sector’s P/E is in the upper half of its 10-year average, it’s fair to characterize valuations as reasonable. We would like to get an even better entry point before considering an upgrade to overweight, which may have to wait for a broad market pullback of 5% or more.
The Technology Sector’s Recent Underperformance May Be Overdone
Source: LPL Research, FactSet 01/07/26
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Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.