Sector Screener: a review of 2025 and look ahead to 2026

The stock market has delivered excellent returns during 2025. The FTSE 350 index, for example, has risen by 16% since the start of the year. Although this marginally lags the S&P 500 index’s 17% gain, and is below the Nikkei’s 29% surge and the DAX’s 22% year-to-date rise, it is nevertheless well ahead of the previous year’s relatively lacklustre 6% improvement.

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Clearly, the FTSE 250’s 6% year-to-date gain has acted as a drag on the FTSE 350 index’s overall performance. Investors have continued to adopt a cautious stance towards the more UK-focused index amid ongoing geopolitical and economic uncertainty. Since the FTSE 350 index is dominated by the more internationally focused FTSE 100, however, the UK large-cap index’s rise of 18% has had an overwhelmingly positive impact on its performance.

Sector gains

From a sector perspective, Precious Metals & Mining has been far and away the top performer in 2025. It has gained 190% year to date, with rising precious metals prices a key catalyst due to their positive impact on profitability among sector incumbents.

Indeed, the silver price has surged by 122% since the start of the year, while the gold price is up 65% year to date. Their performance has been at least partly boosted by US interest rate cuts that make precious metals increasingly attractive vis-à-vis interest-producing assets. Meanwhile, ongoing global geopolitical uncertainty has made the defensive appeal of precious metals increasingly sought after by risk-averse investors.

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The FTSE 350 Aerospace & Defence sector has also been a top performer this year. It has risen by 70%, outperforming the wider stock market by 54 percentage points, as rising defence spending among NATO members prompted increased demand for the shares of sector incumbents.

NATO members will now aim to spend 5% of GDP annually, versus a previous target of 2%, on defence by 2035. When combined with the potential effects of looser monetary policy on GDP growth, which should also have a positive impact on the civil aerospace segment, as well as ongoing conflict in Europe and the Middle East, share prices for Aerospace & Defence sector members have risen sharply this year.

Banking was the third best-performing sector in the FTSE 350 index in 2025. It has risen by 51% year to date, although its performance proved to be relatively volatile. For example, rumours surrounding the prospect of a sector-specific tax hike in the Autumn Budget prompted a sharp decline in the latter part of the year. But this was followed by a recovery as ultimately no such tax announcement was made.  

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Source ShareScope. Data at 10 December 2025. Past performance is not a guide to future performance.

Sector declines

Beverages was the worst-performing sector in the FTSE 350 index in 2025. It has slumped by 26% year to date, thereby underperforming the wider index by 42 percentage points, with its performance negatively affected by alcoholic beverages firm Diageo (LSE:DGE).

The company dominates the sector due to its relatively large size. It has recorded a share price decline of 35% amid a downbeat financial performance that included a downgrade to future guidance, details of an uncertain operating environment and changes to its management team.

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The Software & Computer Services sector also lagged the wider index. It declined by 23%, with disappointing performances from members including Sage Group (The) (LSE:SGE) and Auto Trader Group (LSE:AUTO) weighing on returns.

Relatively high valuations, evolving market growth prospects partly caused by rapid technological change and an uncertain economic outlook, have contributed to share price declines of both companies. Sage is down 16% and Auto Trader by 25% year to date.

A low valuation

The FTSE 350 index’s outlook for 2026 appears to be relatively positive. Even though the FTSE 100 index, which makes up 89% of the FTSE 350, has made strong gains, it still trades on a relatively modest earnings multiple of 17.3. Meanwhile, the FTSE 250 index, which accounts for the remaining 11% of the FTSE 350 index, has a price/earnings (PE) ratio of just 12.0.

Both figures are significantly below the earnings multiple of the S&P 500 index, which currently trades on a PE ratio of 28.3. This suggests that many FTSE 350 members could be subject to upward reratings in future.

Source ShareScope. Data at 10 December 2025. Past performance is not a guide to future performance.

Economic stimulus

In terms of sectors that could perform well next year, cyclical industries may finally begin to feel the positive impact of interest rate cuts enacted over recent months. Although the current era of monetary policy easing began in August last year in the UK, interest rate cuts are unlikely to have had their full impact on GDP growth and other associated economic data due to the existence of time lags.

Given that further interest rate cuts could be ahead in 2026, since inflation is expected to gradually fall towards 2% according to Bank of England forecasts, it would be unsurprising for sectors whose members are relatively reliant on the economy’s performance to perform well.

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And even though more than 80% of the sales of FTSE 100 members are generated abroad, while 55% of the revenue of FTSE 250 incumbents is derived from outside the UK, interest rate cuts in the US and the eurozone over recent months mean that it is a similar story regarding the upcoming impact of monetary policy stimulus across several major developed economies.

Growth potential

Indeed, consumer-focused FTSE 350 sectors including Travel & Leisure, Retailers and Personal Care, Drug & Grocery Stores could deliver strong relative performance in future. In many cases, members of those sectors continue to offer good value for money given their increasingly upbeat long-term growth prospects and solid fundamentals.

Falling interest rates may also have a positive impact on cyclical firms elsewhere. For example, companies that are members of the Industrial Metals & Mining and Industrial Support Services, as well as Household Goods & Home Construction and Real Estate Investment Trust sectors, may find that their bottom lines, and investor sentiment, benefit from a looser monetary policy.

Although stocks in such sectors are likely to be relatively volatile due to their inherent cyclicality, and may therefore be subject to significant share price swings during 2026 as the full impact of tariffs becomes clearer, their long-term risk/reward ratios appear to be attractive.

Favourable industry dynamics

Sectors that continue to have strong long-term growth potential may also prove popular among investors in 2026. For example, the Aerospace & Defence sector is likely to continue to benefit from rising NATO defence spending and an upbeat global economic outlook. Given that it trades on a PE ratio of 19.1 even after its gains in 2025, it still seems to offer good value for money.

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The Pharmaceuticals & Biotechnology sector also appears to have sound long-term growth prospects. Demographic changes, such as a growing and ageing global population, as well as an improving global economic outlook, could mean that its members deliver another strong performance in 2026 after rising by 25% in the past year.

A long-term view

Clearly, the FTSE 350 index’s performance has historically proved to be somewhat unpredictable over a limited time period. And in many cases the catalysts for its temporary demise have been events that were unforecastable ahead of their occurrence.

Given the potential for heightened volatility in future, investors should continue to take a long-term view of companies and the sectors in which they operate. Ultimately, high-quality companies with upbeat growth prospects that trade at attractive prices, are likely to be best placed to deliver relatively strong capital growth in 2026 and over the coming years.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.