Sector cycles: Experts decode past trends — and share key lessons for investors to make smarter moves in 2026

Across market cycles, sectors move in and out of favour, creating both risks and opportunities for investors.

Data from the Bandhan Contra Fund NFO presentation, tracking sector performance from 2017 to 2026, shows how market leadership can shift over time. Here’s what experts have to say about these cycles and what investors should consider before taking a sectoral fund bet.

Which sectors have moved in and out of favour most often?

Mayank Jain, Market Analyst, Share.Market by PhonePe highlighted that “media remained out of favour more often than any other group, staying unloved for nearly eight consecutive years out of the ten-year period studied. IT, FMCG and Banking also appeared multiple times on the out-of-favour list.”

On the other hand, realty, metals, power and pharma appeared frequently among the top-performing sectors, while PSU banks made a strong comeback during their recovery phase. “Stock market leadership is never permanent,” he added.

For sectoral fund investors, this highlights the importance of understanding where a sector is in its cycle, rather than choosing a fund only on the basis of recent returns.

“Almost no sector holds a top-5 in-favour position for more than 2-3 consecutive years, which argues against buy-and-hold sector bets and calls for periodic rebalancing,” Tanvi Kanchan, Associate Director, Anand Rathi Shares & Stock Brokers, noted.

Why did IT and realty turnaround?

“The IT sector lagged in 2017, and realty faced significant headwinds in 2018, yet both eventually transitioned into high-performing sectors shortly after,” Jain noted.

He added that IT's recovery was driven by rising enterprise digital transformation and cloud adoption, which accelerated during the pandemic. Realty recovered as RERA-led consolidation, weaker-player exits, revival in housing demand and favourable interest rates supported established developers.

Why did PSU banks swing so sharply?

Jain explained that “PSU banks emerged as notable market performers in 2022 and 2025 after a prolonged period of distress between 2017 and 2020. The structural recovery followed an extensive balance-sheet clean-up.”

He added that by 2026, the broader bank index moved back into the out-of-favour category, amid concerns over potential net interest margin compression, moderating credit growth, and global institutional allocations shifting towards tech-centric and AI-driven foreign equities.

Is an out-of-favour sector a buying opportunity?

Jain noted that “the media sector lingered in the out-of-favour list for almost eight years before finally moving into the in-favour column in 2026.”

But being out of favour alone does not make a sector attractive. Kanchan explained that “a sector that's merely unloved without a visible earnings catalyst is a value trap. One with an identifiable trigger—regulatory clarity, demand recovery, capacity utilisation turning—is a genuine contrarian opportunity.”

Jain advised investors to look beyond low valuations. A genuine turnaround should involve profitable revenue streams, expanding margins, debt reduction and stronger cash flows.

For investors in sectoral funds, the key is therefore to assess whether the sector's earnings and fundamentals are turning positive.

How long should investors hold a sector bet?

For investors, a sector bet should not be treated as a permanent investment. Kanchan considers 12–24 months a reasonable base period for a sector re-rating thesis to play out, while some cycles can take 2–3 years.

Jain advised investors to reassess or book profits once a sector reaches historically high valuations or its original turnaround thesis has played out.

Which sectors look attractive in 2026?

Kanchan highlighted IT, FMCG, finance, and infrastructure on valuation grounds. IT and FMCG were trading 33.6% and 22.8% below their respective five-year average P/E multiples.

However, she flagged metals as a sector to avoid. It was trading 64.6% above its five-year average P/E after a 28.5% one-year gain.

Jain also highlighted IT and FMCG as sectors trading at meaningful discounts to historical average P/E multiples, offering a statistical margin of safety.

However, he cautioned that both sectors face risks, with IT continuing to grapple with weaker discretionary enterprise spending in Western markets, while FMCG faces domestic challenges.