These Were the Hottest Sectors in 2025. Will They Continue to Be in 2026?

The stock market has had a very good 2025.

With just a few trading days left in the year, the S&P 500 index has risen about 17% (as of Dec. 22), which is pretty strong considering the average annual gain for that index is about 10%.

Three sectors outperformed the broad index during the year. They were information technology (IT), communication services, and industrials.

Image source: Getty Images.

IT, as measured by the State Street Technology Select Sector SPDR Fund (NYSEMKT: XLK), is up 24.9% so far in 2025. Communication services, measured by the State Street Communication Services Select Sector SPDR ETF (NYSEMKT: XLC), climbed 20.5%, and industrials, measured by the State Street Industrial Select Sector SPDR ETF (NYSEMKT: XLI) is up 19.2% so far in 2025 (as of Dec. 22).

What are these sectors' prospects for the new year? Can they continue to lead the pack through 2026?

The Magnificent Seven drove tech higher

As for information technology, the sector was led higher during the year by several Magnificent Seven stocks. Chief among those, of course, was Nvidia, which is the biggest company in the sector by market cap (and the largest company in the world, for that matter); it soared 36.8% in 2025. Microsoft, up 15%, and Apple, up 8.1%, also contributed. Microsoft and Apple are also among the largest companies by market cap. So the gains of these three stocks add even more to the sector's gain, as the S&P Sector Indexes, like the broader S&P 500 index, are market-capitalization weighted.

Several semiconductor makers also pushed the IT sector higher. They were Broadcom, up 47%, Advanced Micro Devices (up 78%), and Micron Technology (up 229%). All of these stocks are artificial intelligence (AI) plays. So IT could continue to lead the market in 2026 if the massive investment in AI continues apace.

Will it? Goldman Sachs thinks so. The investment bank predicts that capital expenditures by AI hyperscalers -- large-scale cloud service providers that offer vast computing, storage, and networking resources -- will nearly triple from 2022-2024 ($485 billion), to $1.4 trillion between 2025 and 2027. Goldman Sachs is not alone in thinking this. The consensus on Wall Street is that hyperscalers will spend $527 billion in 2025 alone.

So yes, it's very possible, maybe even likely, that the IT sector will continue to outperform other S&P 500 sectors in the coming year as demand for these companies' products and services continues to expand rapidly.

Demand for cloud computing and storage sees no ceiling

The situation in communication services is similar. The sector's outperformance in 2025 was largely due to its two largest companies, Alphabet and Meta Platforms, which are also two of the biggest hyperscalers in the world. Meta's share price rose 13% during the year, while Alphabet's shares soared nearly 64%.

And demand for the compute power they provide is expected to skyrocket in the coming years. McKinsey predicts that global demand for data center capacity will triple by 2030, with 70% of that demand from AI workloads.

Thus, the companies in the communication services sector look likely to continue to outperform those in most other sectors in 2026.

Aerospace, defense, and agriculture equipment lead a rally in industrial stocks

The picture in the industrials sector is a bit less straightforward. The rally here has been driven by a few different types of manufacturers, including the defense and aerospace industry, as well as farm equipment and heavy machinery firms.

Aerospace and defense represent a quarter of the industrials sector, and those stocks had an incredible 2025. The S&P Aerospace & Defense Select Industry Index, a sub-index of industrials, is up 46% in 2025. A primary reason those stocks are rising is President Donald Trump's foreign and defense policies, which are forcing NATO members as well as U.S. allies in Asia to increase their defense spending.

And makers of farm equipment and heavy machinery -- like Caterpillar, which is up nearly 61% for the year, and GE Vernova, up 101% -- are benefiting from rebounding agriculture and manufacturing markets.

Can this sector continue its winning ways in 2026? Probably yes. Enhanced defense spending is a multi-year project for countries around the globe. And the surge in agriculture and manufacturing markets may be just getting started due to new farming technologies like precision agriculture, as well as new U.S. trade agreements and favorable Trump administration tax treatments for capex and research and development.

The IT, communication services, and industrials sectors might just replay their leading roles next year.

Matthew Benjamin has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Broadcom and Ge Vernova and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.