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UK stocks have experienced a fantastic 2025. Financial services and banking shares, in particular, have vastly outperformed, followed by a similarly impressive display from the healthcare sector.
And with these industries making up almost 40% of the FTSE 100, it’s no wonder the UK’s flagship index has generated a near-22% total return so far this year!
Since most of these enterprises also pay dividends, a £5,000 initial investment hasn’t only grown to £6,100, but also unlocked a roughly £220 second income in the process.
The question now is, can this momentum continue into 2026?
Interest rates to the rescue
For more than a decade, UK banks were forced to operate in a near-0% interest rate environment. Given that these financial institutions often make the bulk of their income from issuing loans, this was far from ideal. And the impact is clear when looking at the lacklustre share price performance of most banks throughout the 2010s.
With inflation coming along and throwing a spanner in the works, interest rates have jumped much higher. And while the Bank of England has since begun slowly cutting rates, they remain elevated – a tailwind that UK bank stocks are capitalising on.
The result is a sector-wide surge in earnings. And with profits on the rise, paired with limited credit impairments, many banks are posting significantly improved return on tangible equity figures. In other words, shareholder value is on the rise. And with it so are their stock prices.
| Bank Stock | 12-Month Share Price Performance |
| Lloyds Banking Group (LSE:LLOY) | +80% |
| Standard Chartered | +71% |
| Barclays | +64% |
| Natwest Group | +55% |
| HSBC Holdings | +46% |
Is it too late to think about Lloyds?
Let’s zoom in on the leader of the pack – Lloyds Banking Group. Like many of its peers, higher interest rates have bolstered its financials and profitability. And as a result, shareholders have seen a chunky rise in both dividends as well as share buybacks.
Subsequently, the popularity of Lloyds shares continues to rise. And this has only been further compounded by both the increased clarity on motor finance mis-selling obligations, as well as the relief of no windfall tax in the latest government Budget.
Looking out to next year, earnings projections from analysts continue to look promising. Thanks to some clever hedging strategies, Lloyds’ lending margins could remain chunky even as further interest rate cuts emerge.
As such, the experts are predicting revenue to climb by 9.4% versus 2025 full-year estimates, with an even bigger step up in earnings once the motor finance scandal is resolved.
However, looking at the share price forecasts, the average consensus seems to suggest that Lloyds shares may not climb that much higher. Why? Because after a stellar 2025 performance, it seems most of the anticipated growth is already baked into the stock price.
It also means that if any surprise spanners are thrown into the works, volatility could start to creep in. And right now, there continues to be concern surrounding the continued weakness in the UK economy that could pose a significant headwind to sustained outperformance.
With that in mind, the risk-to-reward ratio doesn’t seem worth considering, in my opinion. Instead, investors seeking a second income may be better served searching for other dividend-paying UK stocks. And one high-yielding sector that is already starting to benefit from interest rate cuts is real estate. That’s why I’m already taking a closer look.
