Undervalued Sectors in 2026: Financials, Healthcare, and Tech as Strategic Buys

As 2026 unfolds, the investment landscape is poised for a recalibration driven by shifting macroeconomic dynamics, policy clarity, and the accelerating integration of artificial intelligence (AI). For value investors, this presents a unique opportunity to capitalize on sectors trading below their intrinsic value while aligning with long-term growth themes. Citi's 2026 sector overweights-financials, healthcare, and information technology-offer a compelling case for strategic rebalancing, supported by robust fundamentals, favorable valuation metrics, and macroeconomic tailwinds.

Financials: A Value Play with Structural Catalysts

The financials sector, long undervalued relative to the S&P 500, is emerging as a prime candidate for sector rotation. As of Q4 2025, the sector trades at a forward P/E of 21.8, above its 10-year average of 18.7, but still significantly cheaper than the 36.5x P/E of tech giants like Apple as reported. Regional banks, in particular, trade at a modest P/B ratio of 1.13, reflecting market value close to their book value. This undervaluation is misleading, as earnings growth is projected to accelerate in 2026, driven by AI adoption in fintech and a more favorable interest rate environment.

Citi highlights that financials are benefiting from a "lessening policy overhang" as regulatory clarity around interest rates and banking reforms reduces uncertainty. AI-driven automation in lending, fraud detection, and asset management is also enhancing operational efficiency, with private equity firms allocating over 25% of budgets to AI projects. Meanwhile, a steepening yield curve and potential rate cuts could boost net interest margins, particularly for banks with strong balance sheets. For value investors, the sector's low valuation multiples and improving fundamentals make it an attractive entry point.

Healthcare: Policy Clarity and AI-Driven Innovation

Healthcare is another sector where undervaluation aligns with transformative growth. Citi anticipates a "lessening policy overhang" as drug pricing negotiations with the Trump administration reach resolution, reducing regulatory drag on pharma and biotech firms. This policy clarity, combined with a shift toward value-based care models, is creating a favorable environment for companies demonstrating measurable outcomes.

Valuation metrics in healthcare subsectors like Medtech and digital health are particularly compelling. In 2025, Medtech companies with $5–10M EBITDA commanded multiples of 14.4x, while those generating $10–50M in revenue traded at 4.65x revenue. These metrics reflect strong investor appetite for innovation-driven care models, especially those integrating AI for diagnostics, personalized medicine, and operational efficiency. For example, AI-powered platforms are reducing costs in hospital management and streamlining drug discovery pipelines, creating long-term value for stakeholders.

The sector's undervaluation relative to its growth potential is further underscored by increased insider purchases and reduced selling activity. With policy risks diminishing and AI adoption accelerating, healthcare is positioned to outperform in 2026.

Technology: AI Monetization and Selective Earnings Growth

While tech valuations remain elevated, the sector's 2026 outlook hinges on its ability to monetize AI investments. The S&P 500 is projected to deliver 5%–9% total returns in 2026, driven by 7%–10% earnings growth. However, returns will be selective, favoring companies that can demonstrate tangible ROI from AI initiatives.

Semiconductors, cloud infrastructure, and enterprise AI platforms are leading the charge. AI infrastructure spending is expected to exceed $500 billion globally, with the Magnificent Seven (e.g., Apple, Microsoft, Alphabet) projected to see 16.5% earnings growth. Microsoft's forward P/E of 30.5x, close to its five-year average, and Alphabet's 28x multiple, supported by cloud growth, suggest valuations are justified by fundamentals. Conversely, companies like Apple face scrutiny if AI-driven hardware cycles fail to materialize.

The key for investors is to focus on subsectors with clear monetization paths. Autonomous AI agents, agentic systems, and outcome-based SaaS models are expected to drive innovation, with the autonomous AI market projected to reach $8.5 billion by 2026. While tech valuations are stretched compared to historical averages, earnings growth-not P/E expansion-will be the primary driver of returns as analysis shows.

Strategic Rebalancing: A Value Investor's Playbook

For 2026, a strategic rebalancing toward financials and healthcare, while selectively investing in AI-driven tech subsectors, offers a balanced approach. Financials and healthcare trade at discounts to the S&P 500 on forward earnings and price-to-book metrics, with strong catalysts like AI adoption and policy clarity as data shows. Tech, though more expensive, remains a growth engine for those prioritizing innovation.

Investors should prioritize companies with robust earnings revisions, strong cash flows, and clear AI monetization strategies. In financials, regional banks and fintechs with AI-driven efficiency gains are top picks. In healthcare, Medtech and digital health platforms with high EBITDA multiples and AI integration are prime targets. For tech, semiconductors and cloud infrastructure providers with scalable AI applications warrant attention.

Conclusion

The 2026 investment landscape is defined by sector rotation from overvalued growth stocks to undervalued fundamentals. Citi's overweights-financials, healthcare, and tech-offer a roadmap for value investors seeking to capitalize on macroeconomic shifts and technological innovation. By leveraging valuation metrics, earnings growth, and AI-driven trends, a strategic rebalancing toward these sectors can unlock long-term value in an evolving market.