Should you invest in UK stocks for 2026?

Whichever way you look at it, UK equities look ripe for a rebound. Despite widespread pessimism about the UK economy, its stock market might be in better health than many think.

Research from AJ Bell recently found that 57% of UK investors say they are backing British stocks in 2026. That follows on from analysis showing that, of the ten most popular stocks of 2025 among DIY investors on AJ Bell, seven were UK-listed.

Throughout 2025, UK stocks have benefitted from a rotation away from US stocks, brought about by fears over an artificial intelligence (AI) bubble as well as the turmoil that Donald Trump’s tariffs have brought to international trade.

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“Earlier this year, heightened concerns around political instability and macroeconomic uncertainty in the US prompted retail investors to diversify more aggressively into Europe and emerging markets, often scaling back US exposure,” said Lale Akoner, global market strategist at eToro.

The FTSE 100 has outpaced the S&P 500 so far this year on a total return basis. The FTSE 100 Total Return index returned 22.4% in the year to 17 December, compared to 16% for the S&P 500’s equivalent.

All of this puts UK stocks on course to make 2025 their best-performing calendar year since 2013 (as of 17 December), according to analysis from Fidelity International.

But the good times could be set to continue in 2026 for UK stocks.

“The UK enters the year from a position of strength,” said Alex Wright, portfolio manager of Fidelity Special Values (LON:FSV), an investment trust that focuses on undervalued UK stocks. “The market continues to trade at a meaningful discount to other major regions – both on outright price to earnings multiples and after adjusting for structural sector differences, such as the heavy weighting of technology in US indices.”

Could the UK economy rebound in 2026?

On 18 December the Monetary Policy Committee (MPC) cut UK interest rates to 3.75%, following a surprisingly large drop in UK inflation to 3.2% in the year to November.

While recent economic data has supported the view that the UK economy is struggling, it feeds into a potentially optimistic picture.

“UK household balance sheets are healthy, and savings rates elevated,” said Wright. “With inflation easing and interest rates likely to follow, improving confidence could support consumption.”

That, in Wright’s view, encourages the potential for turnaround stories, particularly in unloved, domestically-focused sectors like housing, furnishings and home improvement.

Even if the UK economy continues to struggle, Wright points out that buying UK stocks is not the same as buying the UK economy.

“More than three-quarters of revenues generated by UK-listed companies come from overseas, providing investors with access to globally diversified earnings streams at valuations that remain attractive relative to international peers,” he said.

Which UK stocks and sectors could be set to grow?

Besides domestic-focused stocks, Write also sees potential in UK small caps, which have not been rerated to the same extent that the large cap FTSE 100 has so far this year.

“Large-cap companies are trading close to their long-term averages, with the FTSE 100 on 14.2x forward price to earnings,” said Wright, “whereas mid-cap and small-cap companies remain materially undervalued, trading at 11.4x and 10.8x forward earnings respectively.” (Figures as of 30 November).

Wright is also taking a diversified position towards UK financial stocks. Potential growth areas in the portfolio are balanced with earnings streams from traditionally defensive sectors such as utilities, support services and non-life insurance.