Cyclical sectors regain leadership: Financials and Industrials drive momentum
Cyclical sectors are reclaiming leadership as the economic growth outlook strengthens on the back of monetary and fiscal support. Industrials, Financials, and Energy have led performance since late 4Q25—a broad advance in cyclical sectors.1
After months of underperformance in 2025, Energy had a bullish technical breakout on the first trading day following the US capture of Venezuelan President Nicolás Maduro on January 3. More importantly, other cyclical sectors, such as Financials and Industrials, have also shown notable upside price movement to start the year.2 These positive developments within Financials and Industrials are built on the sectors’ strong performance in December, with both outperforming the broad market for the month.3
Recent performance strength in Financials and Industrials has led to a reversal of their underperformance in 3Q25 relative to the S&P 500.4 Positive developments at the industry level are key to advances in Financials and Industrials.
Financials: Monetary easing and deregulation provide tailwinds
Within Financials, bank and capital market industries were important contributors to the sector’s bullish breakout in December and the ongoing positive outlook for 2026. Federal Reserve (Fed) interest rate cuts—both the lagging effect of the cumulative 75 basis points of rate cuts since last September and the additional two cuts expected by the market for this year—could boost business lending and capital markets activity. And the resulting steeper yield curve may lead to improving profitability in Financials more broadly.
In terms of deregulation, banking regulators and supervisors issued several final or proposed regulatory changes that have led to lower capital requirements and supervisory standards, including modifications to the enhanced supplementary leverage ratio (eSLR) and stress test models. Additionally, a capital neutral Basell III Endgame and lower additional capital requirements for Global Systemically Important Banks may further improve banks’ capital efficiency, lower the cost of capital, and boost return on equity.
Moreover, supported by an improved antitrust and macroeconomic backdrop, M&A and IPO activity within the sector may continue to accelerate beyond its current below average cyclical activity level, likely leading to strong investment banking revenue growth.5
Regulatory progress on digital asset market structure and asset tokenization also are likely to stimulate innovation in capital markets and drive new opportunities.
Industrials: Powered by defense spending and infrastructure investment
Industrials reversed its underperformance trend in late Q4 (Figure 2), aided by improved performance in the aerospace & defense industry. As the global geopolitical landscape remains volatile from Venezuela and Ukraine to the South China Sea, the industry has been benefiting from both higher global defense spending and rising power demand and competition.
The US alone has allocated $1.16 trillion to national defense expenditures and gross investment, an all-time high, and the geopolitical environment likely points to that figure steadily rising.6 Analysts project industry earnings will rise 51% in 2026, following an 81.5% increase in 3Q25 and an anticipated 144% surge in 4Q25.7
In addition to defense spending, the machinery and electrical equipment industries, which represent more than 47% of the Industrial sector, stand to benefit from increasing demand and investment in power infrastructure—a crucial component in the current AI capital expenditure cycle. Analysts are projecting machinery earnings to grow by 10.5% in 2026, while electrical equipment is slated to grow by 20%.8
Energy: Short-term catalysts, medium-term constraints
Following the US capture of Maduro, the Energy sector experienced a positive technical breakout from a multi-month triangle pattern (Figure 3). This resulted in the S&P 500 Energy Index reaching its highest intraday price since November 2024.9
Yet, given the dynamic nature of the political situation, price action is likely to remain volatile as evidenced in the sector’s heightened implied volatility.10 Near-term catalysts for Energy are now in motion as major oil producers and refiners as well as energy equipment and service providers may benefit from expectations of improved operating ability and asset recovery in Venezuela.
But the sector’s medium-term outlook remains constrained as the global oil oversupply story persists and the prospect for higher long-term Venezuelan oil production limits the potential upside of any oil rebound when demand begins to recover. This dynamic is reflected in the contango shape of the oil futures curve for this year.11
Although Venezuela holds the world’s largest proven oil reserves, years of underinvestment and deterioration across its production and transportation infrastructure mean that substantial capital and technical support will be required to restore output to meaningful levels. Any increase in supply over time is likely to introduce downward pressure on oil prices and the sector’s earnings.
Cyclicals outlook: Where to focus in 2026
Amid uncertainty in Venezuela, one investment implication is clear: an emerging opportunity in cyclical sectors is underway. The strong yet volatile breakout in Energy has brought more attention to the emerging leadership across cyclical sectors, but Financials and Industrials are particularly well-positioned to advance further on the back of strong earnings outlooks, easing monetary policy, and expansive fiscal stimulus.