Prediction: This Is the 1 Sector That Will Beat the S&P 500 in 2026
Key Points
Technology stocks' long-lived AI-driven rally may or may not reignite itself, depending on perceptions of AI's real value.
Economic headwinds can take a toll on all stocks, but a handful of tailwinds are blowing that appear unstoppable.
Individual stocks or a basket of stocks from this sector will both work fine to gain exposure to this sector.
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Any prediction about stocks' future performance should be taken with a grain of salt. The following prediction is no exception (but it is an educated guess). I think the one sector best positioned to outperform the S&P 500 this year is industrials.
The case for owning industrial stocks in 2026
Surprised? It would be a little surprising if you weren't. There's always the chance that artificial intelligence (AI) tech stocks could get their second wind, or that investors may rush to the safety of consumer staples. And perhaps that's how things will pan out.
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But given the market's propensity for throwing curve balls, it's not crazy to expect the least expected outcome from here.
Besides, there are some straightforward arguments for expecting big things from the industrials sector.
One of them is the fact that aerospace and defense stocks are typically categorized as industrials. Between the depletion of armaments due to the ongoing conflict in the Middle East and the recently successful Artemis II mission to the moon, a wide swath of these names is catching a new tailwind.
Arguably more bullish for these stocks, however, is the demand for these companies' services that isn't going to fade -- or wait -- regardless of any economic or geopolitical backdrop. As analysts with brokerage firm Charles Schwab noted in this month's sector-by-sector outlook, "industrial demand is broad-based, driven by AI-fueled data-center buildouts and higher defense spending." The analysis adds the sector's "growth outlook is structurally stronger than in the previous decade, supported by mega-trends such as decarbonization, electrification, digitalization and reindustrialization."
And for what it's worth, industrials is one of only two sectors Schwab's analysts are bullish on at this time.
Own at least some, one way or another
Obviously, this isn't the only sector you'll want to be exposed to this year. The underpinnings for at least owning some exposure to industrial stocks, though -- perhaps with a simple instrument like the State Street Industrial Select Sector SPDR ETF (NYSEMKT: XLI) or the Vanguard Industrials ETF (NYSEMKT: VIS) -- certainly hold water.
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Charles Schwab is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab and recommends the following options: short March 2026 $100 calls on Charles Schwab. The Motley Fool has a disclosure policy.
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