2026 Sector Playbook Analysis: Financials, Industrials, Utilities Identified as Undervalued Amid Sector Rotation

This analysis is based on MarketBeat’s 2026 Sector Playbook [1], published on January 1, 2026, which highlights financials (XLF), industrials (XLI), and utilities (XLU) as sectors trading below fair value amid ongoing sector rotation out of overvalued AI stocks. Short-term market data [0] shows that in December 2025, financials (XLF +3.20%) and industrials (XLI +1.69%) outperformed the S&P 500 (SPY +0.46%), while utilities (XLU) underperformed (-5.26%). On January 1, 2026, all sectors declined, with utilities (-1.13%) the worst performer and communication services (-0.14%) the best.

Valuation metrics [1] reveal the S&P 500 had a forward P/E ratio of 23.10 as of December 31, 2025 [4]. Financials (XLF) and utilities (XLU) exhibit lower P/E ratios (18.25 and 20.74, respectively), while industrials (XLI) have a slightly higher P/E (24.30) offset by a projected 19% earnings growth in 2026 [2]. Catalysts for these sectors include rate expectations for financials, capex and infrastructure demand for industrials, and data center energy needs and grid upgrades for utilities [1]. Notably, consensus price targets for XLF, XLI, and XLU are equal to their current prices [1], creating a contradiction with MarketBeat’s fair value claim.

1. The sector rotation out of AI stocks into undervalued sectors is already visible in December 2025 performance [0], but utilities’ underperformance (-5.26%) raises questions about near-term investor sentiment toward the sector despite long-term catalysts [1].
2. The S&P 500’s CAPE ratio of 40.54 [3]—significantly above historical averages—adds macroeconomic context to the search for undervalued sectors, as a market correction could accelerate rotation into value stocks.
3. Industrials’ 19% projected earnings growth [2] (following tech’s 23% and materials’ 21%) justifies its slightly higher P/E ratio compared to the S&P 500, supporting MarketBeat’s fair value assessment for this sector.

• Financials (XLF):
  Offer value with a low P/E (18.25) and benefit from potential rate changes and sector rotation [1].
• Industrials (XLI):
  Have strong earnings growth projections (19% in 2026) [2] and catalysts from infrastructure and capex trends [1].
• Utilities (XLU):
  Supported by long-term demand for grid upgrades and data center energy [1], despite recent underperformance.

• The S&P 500’s high CAPE ratio (40.54) [3] indicates potential overvaluation and correction risk.
• Sector rotation may not be sustained if AI stocks regain momentum or macroeconomic conditions shift.
• Utilities are sensitive to rising interest rates, which increase borrowing costs [1].
• Missing earnings projections for financials and utilities [2] could undermine their fair value assessments.
• MarketBeat’s fair value methodology is not fully disclosed [1], limiting transparency for decision-makers.

• Three sectors (financials, industrials, utilities) were identified as undervalued in MarketBeat’s 2026 Sector Playbook [1].
• XLF and XLU have lower P/E ratios than the S&P 500, while XLI has higher projected earnings growth [1][2][4].
• December 2025 performance shows XLF and XLI outperforming the S&P 500, with XLU underperforming [0].
• Catalysts include rate expectations (financials), capex/infrastructure (industrials), and grid upgrades/data center demand (utilities) [1].
• Key risks include S&P 500 overvaluation, unsustained sector rotation, utilities’ interest rate sensitivity, and missing earnings data [2][3].