Investors are pouring fresh money into U.S. healthcare stocks, pushing the sector's benchmark to a record high as Wall Street's rally widens beyond the AI-linked technology names that have led the market this year. Stronger earnings, a wave of dealmaking and comparatively cheap valuations are driving the shift, while the November midterm elections add a fresh variable.
The S&P 500's healthcare index climbed 11.2% over the past three months to a record high, outpacing the broader index's 6% gain over the same period, with financials also climbing as the AI-driven technology trade cools, Reuters reported.
Fund inflows snap a three-month slide
Around 50 U.S.-listed healthcare funds attracted $2.44 billion in July, according to LSEG Lipper data. That followed nearly $1.5 billion of inflows in June and reversed a three-month stretch of net withdrawals.
A Bank of America survey showed global fund managers were net 32% overweight on healthcare stocks in July, up sharply from 14% in June. J.P. Morgan analysts led by Dubravko Lakos-Bujas cited the sector's durable growth and diversification benefits.
Earnings improve and dealmaking accelerates
Earnings for S&P 500 healthcare companies are expected to grow in double digits from Q4 2026 through the end of 2027, according to Tajinder Dhillon, head of earnings and equity research at LSEG. That would reverse a 16.7% earnings contraction in Q2 2026.
Drugmaker AbbVie topped its second-quarter profit estimates. UnitedHealth Group beat profit expectations and raised its 2026 forecast.
Dealmaking has also added to the sector's appeal: M&A value has reached nearly $284 billion this year, according to Dealogic, approaching 2025's total of $306 billion and topping every other year since 2021. A media report earlier this week said AstraZeneca and Bristol-Myers Squibb held talks about a possible merger that could create a pharmaceutical company with a combined value of nearly $400 billion.
Healthcare trades cheaper than the broader market
Healthcare shares traded at around 18 times forward 12-month earnings, above the sector's 20-year average of 15. The S&P 500 as a whole carried a forward multiple of nearly 20 times earnings over the same period.
Some analysts drew a parallel to 2022, when a similar rotation trade lost momentum once investors regained confidence in the tech rally. But Mark Hackett, chief market strategist at Nationwide, said what stands out this time is that the S&P 500 itself is at record highs.
Midterm elections add a policy wildcard
Healthcare will be a central point of debate heading into November's midterm elections, though the impact on individual companies could vary. If Democrats retake the House, they would likely revive efforts to expand the Affordable Care Act and strengthen Medicaid funding. Such a shift could benefit health insurers with large Medicaid and ACA businesses, while hospital chains could gain from higher insured patient volumes.
J.P. Morgan analysts said healthcare equipment and services companies have historically performed well in midterm years, though they don't expect a material policy change this year. Eric Parnell, chief market strategist at Great Valley Advisor Group, said, "It's a net positive for the healthcare sector" because it could ease the threat of earnings-pressuring legislation.
Source: Reuters
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