Key facts
- The S&P 500 healthcare index has climbed 11.2% in the past three months, outperforming the S&P 500.
- Healthcare funds attracted $2.44 billion in July, continuing a trend of strong inflows.
- Earnings for S&P 500 healthcare companies are expected to grow significantly from late 2026.
- Healthcare M&A value has reached nearly $284 billion this year, approaching 2025's total.
- Healthcare valuations are considered attractive, trading at 18 times forward earnings compared to the S&P 500's nearly 20 times.
Wall Street is increasingly favoring U.S. healthcare stocks, signaling a broader shift away from the dominance of AI-related technology companies in market returns. This renewed investor interest is driven by expectations of improving earnings, a surge in dealmaking, and attractive valuations within the healthcare sector.
The S&P 500 healthcare index has seen a significant rebound, climbing 11.2% in the last three months to reach a record high, outperforming the broader S&P 500's 6% rise. This performance has attracted substantial capital, with U.S.-listed healthcare funds experiencing significant inflows in July and June, reversing previous withdrawal trends.
Analysts point to a combination of factors fueling this optimism. Earnings for S&P 500 healthcare companies are projected to grow robustly from late 2026 through 2027, a notable turnaround from recent contractions. Companies like AbbVie and UnitedHealth Group have already reported strong second-quarter results, exceeding profit expectations. The healthcare sector has also seen a significant uptick in merger and acquisition activity, with deal value approaching $284 billion this year, and potential mega-mergers, such as reported talks between AstraZeneca and Bristol-Myers Squibb, further boosting sentiment.
Valuations are also a key draw, with the sector trading at a historically attractive multiple of 18 times forward earnings, compared to the S&P 500's nearly 20 times. While some draw parallels to past rotations that lost momentum, the current market environment, with the S&P 500 at record highs, suggests a potentially more sustainable shift towards undervalued sectors.
Looking ahead to the U.S. midterm elections, healthcare policy is expected to be a significant debate. Potential shifts, such as Democrats expanding the Affordable Care Act or strengthening Medicaid, could benefit health insurers and hospital chains. Some strategists believe a divided government could be a net positive, reducing the threat of earnings-pressuring legislation for the sector.