Picking the next sector winner

The first started with a lead-in, asking readers to remember all those headlines about the US stock market being super concentrated in the “Magnificent Seven”, then he posed the question, “The S&P 500 returned 17.68% in 2025. What was the S&P 500’s total return without the Mag 7?”

10. a) 10.36%
11. b) 1.36%
12. c) -1.36%
13. d) -10.36%

The answer is 10.36%. Well over 50% of the returns. The lesson Mr Zweig posits is that, despite all the recent alarm about concentration, be wary of people wanting to sell you something riskier. This is the wrong lesson, investors should consider, rather, what sectors other than technology are driving the US share market’s returns, and where else are opportunities. These could represent much more than 50% of the share it represented in 2025.¹

Over the past three years, to the end of December 2025, global equities have delivered strong gains, with the S&P Global 1200 Index, a proxy for global developed markets, returning 23.16% per annum.²

Sector-level dispersion within the S&P Global 1200 has been considerable. Unsurprisingly, the information technology sector led with a 38.20% per annum return, followed by communication services 35.71%. Meanwhile, more defensive sectors were among the worst performers, with utilities gaining 12.80% per annum, followed by materials at 10.71% per year, then healthcare at 6.82%, energy at 6.77% and consumer staples at 5.97%³. (Note: The S&P Global 1200 Index is heavily exposed to US equities, with a 68% weight in the country as of 31 December 2025.)⁴

But the three-year numbers mask a recent trend. As we noted in our most recent quarterly viewpoint, over the three months to the end of December 2025, healthcare was the best-performing, and materials was the second best. Could it be that these sectors, in what was a positive market for global equities, helped drive the returns Mr Zweig highlighted above?

If momentum in these sectors continues, it will be important for investors to consider their approaches to them.

Materials (and energy and utilities)

The returns in the materials sector vary between sub-sectors, and within each of these sub-sectors, specialised skills are required to assess the materials being produced. This is where ETFs are useful tools for investors. Investors can cost-effectively invest in a basket of companies specialising in certain sub-sectors or industries.

Gold miners

A new year, and new queues in Sydney’s Martin Place as investors seek the defensive characteristics of the world’s oldest currency.

The latest ViewPoint highlighted why investors were lining up for gold during the last quarter of 2025, including highly valued share markets, excessive government spending, massive government debts and seemingly unchecked money creation. President Trump’s military action in Venezuela stoked further geopolitical fears. It’s little wonder some investors are on edge, driving demand for gold.

One of the beneficiaries of a rising gold price is the companies that mine it. Gold miners, as represented by the NYSE Arca Gold Miners Index (AUD), returned 139.81% over the 2025 calendar year. Should the price of gold rise further, so too could the price of gold mining companies. According to the ViewPoint, “We still think gold miners remain fundamentally undervalued relative to the metal itself. With all-in sustaining costs averaging around US$1,600/oz and current prices in excess of US$4,000/ oz, the result has been record margins across the industry. Miners are displaying improved capital discipline and stronger balance sheets, a key differentiator from previous cycles when high prices often led to overspending.” Further, we think merger and acquisition activity in the sector will heat up.

Companies will be providing 2026 annual production and cost guidance when they report their 2025 fourth quarter results, starting at the end of February. The production cost sensitivity to the gold price appears, to us, to be well telegraphed. In our view, the gold miners sub-sector remains attractive. Even if the realised gold price doesn’t offset the cost increases this year, gold mining companies’ margins and free cash flow generation should be robust and remain above historical levels, at a time when their stocks still trade at historically low multiples.

Gold miners could be winners again in 2026.

Nuclear

One of the recent “winners” within the global energy complex, capturing energy, utilities and mining companies has been nuclear. Demand for low carbon, efficient energy sources, primarily driven by the artificial intelligence sector, has resulted in a recent boom for uranium miners and nuclear energy infrastructure sectors. Some of the companies within the markets helped drive global equity markets in 2025 and this could continue into 2026.

Three key forces are currently powering the investment case for the nuclear energy ecosystem:

1. Increasing Electricity Demand: The International Energy Agency⁵projects that global electricity demand will increase by 3.7% in 2026, led by emerging economies such as China and India and powered by several trends, including:

• Artificial Intelligence: Advances in artificial intelligence and other data-heavy technologies are rapidly increasing the need for data centres and their associated power consumption.
• Electric Vehicles: Electric vehicle ownership is on the rise, along with a range of battery-powered machinery, all requiring electricity for charging.
• Cryptocurrency: The continued adoption of digital assets is adding to the world’s growing power demand.
• Climate/Heatwaves: Intense heatwaves in many regions have contributed to this elevated electricity demand, straining local power grids.

2. Reliable, Clean Energy Source: Global efforts to reduce greenhouse gas emissions by building out renewable energy capacity have, by many accounts, fallen behind schedule. This has raised the profile of existing nuclear facilities and new construction as important components of the global energy transition.

• Nuclear energy has notably lower emissions compared to some renewable energy sources, and there are no limits on when nuclear facilities can generate power. Unlike wind and solar energy, which face the hurdles of calm winds and dark skies, nuclear energy can provide consistent and reliable power.
• Additionally, nuclear energy requires a fraction of the land compared to solar and wind, making it a compact and efficient source of electricity. For example, the average 1,000-megawatt nuclear plant in the United States needs about 1.3 square miles of land, compared to 31 times more land for solar and 173 times more land for wind.

3. Increased Regulatory Support⁶: An important tailwind for nuclear energy is the renewed support from many governments. Following the Fukushima nuclear accident in 2011, many countries deprioritised nuclear energy in favour of other sources. However, in recent years, many have reversed their stance or affirmed their commitment, recognising the critical importance of nuclear energy in the power mix:

• United States: The US has reversed course by choosing to extend the life of several nuclear power plants that were set to be decommissioned. Recently, the US Nuclear Regulatory Commission renewed the operating licenses at the North Anna Power Plant in Virginia, extending their operating lifetime by 20 years to nearly 2060. This trend is evident in many regions of the US.
  Legislative milestones such as the ADVANCE Act and the Inflation Reduction Act are providing critical support for nuclear technologies. The ADVANCE Act streamlines regulatory processes, fosters public-private partnerships, and accelerates innovation in small modular reactors (SMRs). Similarly, the Inflation Reduction Act bolsters nuclear energy’s competitiveness by offering production tax credits, levelling the playing field with renewable sources like wind and solar.
• Japan: Despite Fukushima being fresh in their collective memory, Japanese leaders have begun taking steps toward expanding nuclear capacity. In late August, Prime Minister Fumio Kishida announced plans to hold a ministerial meeting to discuss measures needed to restart existing reactors at a Tokyo Electric Power Company facility.
• China: China has made significant, strategic investments in nuclear fusion. By some estimates, the Chinese government is spending around US$1.5 billion annually on fusion research, nearly twice that of the US.
• Switzerland: The Swiss Federal Council is set to reverse a 2017 voter-approved ban on the new construction of nuclear power plants.
• India: India’s Department of Atomic Energy currently plans to deploy 50 small modular reactors in the country. They hope to create versions that can easily be deployed in older, non-nuclear power plants.
• Norway: Norway has entered into a memorandum of understanding with South Korea’s DL Energy and DL E&C to explore the construction of a nuclear power plant at one of the country’s oil refineries.

Health care

The recent improvement in returns, relative to the rest of the market, we think, reflects strengthening fundamentals in the health care sector. But taking a broad market capitalisation approach to global health care could leave investors with a long tail and potential concentration risks. Active managers make bets on who they think might be tomorrow’s winners based on complex and risky factors such as drug trials, novel science and winning regulatory approvals. While others use a rules-based approach that targets companies that are attractively valued, while also targeting those that consistently deliver growth. Such a GARP (growth at a reasonable price) approach has the potential to deliver greater rewards to investors over the longer term.

The MarketGrader Developed Markets (ex-Australia) Health Care Index, is calculated to select the 50 highest-rated health care companies across all developed markets outside of Australia, utilising MarketGrader’s fundamentals-driven GARP framework. To put the index’s selectivity into perspective, MarketGrader assesses 814 health care companies with a market cap of at least USD $500 million, representing its entire investable universe. Only 6% of eligible companies are selected.

Analysing the index’s 50 constituents, 44 companies (88%) reported growth in trailing-twelve-month earnings per share (EPS) as at 31 December 2025, compared with a year earlier, with a median year-over-year growth rate of 20%. Importantly, this profit growth has been accompanied by solid top-line gains and meaningful margin expansion. Median quarterly revenue growth across the index was 8.2% versus the prior year, while median trailing-twelve-month revenue growth reached 8.7%. Median operating margins increased from 20.6% a year ago to 28.6%, and median net profit margins rose from 17% to 21.4% over the same period. Together, these results indicate broad-based operational improvement across the index’s constituents.

A few constituents that delivered exceptional earnings growth are worth highlighting, including 3 companies that posted more than 300% gains in trailing-twelve-month EPS. They appear in Figure 1.

Figure 1. Companies in the MarketGrader Developed Markets (ex-Australia) Health Care Index with more than 300% last twelve months (LTM) EPS growth

Sources: FactSet & MarketGrader Research, 31 December 2025. This is not a recommendation to act.

The index’s better known health care companies have also done well. For example, Eli Lilly & Co. (LLY-US) recorded trailing-twelve-month revenue growth of 76.0%, alongside continued margin expansion. Quarterly operating margins increased from 42.0% to 47.7%, while trailing-twelve-month margins improved from 37.8% to 44.4%. For a company of its scale, nearly US$1 trillion in market capitalisation with quarterly sales exceeding US$17 billion, these figures remain notable.

Johnson & Johnson (JNJ-US) also did well posting trailing-twelve-month revenue growth of 78.7%. Quarterly operating margin increased from 15.6% to 29.6%, and trailing-twelve-month operating margins rose from 23.5% to 25.8%, reflecting improved profitability across its diversified business lines.

Health care’s strong end to 2025 could continue well into 2026, but selectivity will be key.

We think health care, gold miners, and those companies involved in nuclear energy production are well placed to contribute to the global share market’s returns in 2026 and beyond.

An investment in our global healthcare, gold miners and Uranium and Energy Innovation ETFs carry risks associated with: ASX trading time differences, financial markets generally, individual company management, industry sectors, foreign currency, country or sector concentration, political, regulatory and tax risks, fund operations, liquidity and tracking an index. See the relevant PDS and TMD for more details.  

HLTH, GDX and URAN are likely to be appropriate for a consumer who is seeking capital growth, is intending to use the product as a minor or satellite allocation within a portfolio, has an investment timeframe of at least 5 years, and has a very high risk/return profile.

The author wishes to acknowledge Marketgrader’s blog on the heath care sector https://www.marketgraderindexes.com/is-health-care-turning-the-corner-recent-results-suggest-so/

Sources:

1 – All the returns in US dollars. It is also worth noting that Australian investors tend to raise an eyebrow when US investors talk about concentration, noting that our own share market is more concentrated, and has been that way for some time.

2 - Source: Morningstar Direct. 31 December 2025. Past Performance is not a reliable guide to future performance. All figures are based on total returns, calculated in Australian dollars. 

3 - Source: Morningstar Direct. 31 December 2025. Past Performance is not a reliable guide to future performance. All figures are based on total returns, calculated in Australian dollars.  Indices used: S&P Global 1200 Communications Services Index, S&P Global 1200 Information Technology Index, S&P Global 1200 Utilities Index, S&P Global 1200 Materials Index, S&P Global 1200 Health Care Index, S&P Global 1200 Energy Index, S&P Global 1200 Consumer Staples Index.

4-  Source: S&P Global

5 - Electricity Mid-Year Update; IEA; July 2025.

6 - Global Nuclear News – 4w August; CLSA; September 2024.