From Laggard to Leader: The Surprising Comeback of Healthcare

Healthcare stocks have finally stepped back into the spotlight. After spending much of the past several years in the shadow of technology and AI, the sector has quietly emerged as one of the year’s more compelling comeback stories.

Key Takeaways

• Market Leader: Healthcare stocks rose 10% through September 30, driving more than $8 billion into healthcare ETFs.
• Earnings Growth: Healthcare led all sectors with an 18.1% Q2 earnings surprise, supported by $65+ billion in Q1 M&A.
• Weight Loss: Diabetes/obesity treatments are projected to top $100 billion by 2030.

Trailing only energy and technology, healthcare is now the third best-performing S&P 500 sector both for the third quarter and year-to-date, with the Health Care Select Sector SPDR ETF (XLV) rising 10% through September 30. The rally stems from improving pharmaceutical fundamentals, a biotech revival, historically favorable entry valuations, and systematic portfolio rebalancing away from concentrated tech positions and high-flying AI valuations.

Valuations Meet Improving Fundamentals

Compelling entry points were the first big draw. The sector entered 2026 at a steep historical discount following a three-year string of lackluster gains. State Street data indicates the sector’s forward P/E multiple relative to the broader market had fallen to the lowest quintile of its 15-year historical range. Earnings surprises helped validate the turn. Healthcare companies delivered an 18.1% adjusted upside earnings surprise in Q2 — the largest bottom-line beat among all 11 sectors. That recovery, however, has been uneven beneath the surface. Drugmakers, biotech, and managed care companies have led, while medical devices have lagged. Resilient drug demand and successful product launches bolstered traditional pharma, while large drugmakers pursued M&A to replenish pipelines ahead of patent expirations. According to PwC, pharmaceutical and life sciences M&A topped $65 billion in Q1 — its strongest start to a year for dealmaking since 2020.

Secular Tailwinds: Weight Loss & AI

Beyond traditional fundamentals, two major secular drivers are expanding the sector’s horizon:

• Anti-Obesity Medication/GLP-1 expansion. Commercial momentum behind GLP-1 weight-loss therapies continues to build. Eli Lilly and Novo Nordisk remain primary beneficiaries, with next-generation oral drugs and expanded therapeutic applications (cardiovascular, sleep apnea, kidney disease) broadening the addressable market. The global market for type-2 diabetes and obesity treatments is projected to top $100 billion by 2030 — more than double 2025 levels.
• AI’s transformative impact. AI is shifting from a pure tech theme into an operational tailwind across the entire healthcare value chain. Biopharma firms are deploying AI to accelerate target discovery and streamline clinical trials to boost R&D productivity, while health systems and managed care providers leverage generative AI and lab automation to curb administrative overhead and expand operating margins.

Portfolio Rebalancing & ETF Positioning

ETF investors have increasingly rotated into defensive and cash-flow-positive sectors like healthcare as a hedge against tech sector turbulence. Driven by the dual appeal as a macro buffer and an innovation play, U.S. healthcare ETFs absorbed more than $8 billion in net inflows through early September. Investors can capture the sector’s recovery across varying levels of specialization:

• Broad Core: Gathering half a billion in net inflows, XLV offers large-cap exposure to S&P 500 healthcare leaders like Eli Lilly, Johnson & Johnson, and AbbVie. The Vanguard Health Care ETF (VHT) extends that reach across large-, mid- and small-caps, while the Invesco S&P 500 Equal Weight Health Care ETF (RSPH) eliminates single-stock concentration risk.
• Targeted Subsectors: The SPDR S&P Biotech ETF (XBI) provides equal-weighted exposure to mid- and small-cap innovators, whereas the iShares Biotechnology ETF (IBB) tilts toward established megacap biotech firms – drawing nearly $700 million in year-to-date net inflows. Focusing strictly on drugmakers, the iShares U.S. Pharmaceuticals ETF (IHE) has accrued $550 million in net inflows.
• Specialized & Thematic: Funds like the Roundhill GLP 1 and Weight Loss ETF (OZEM) and the Amplify Weight Loss Drug & Treatment ETF (THNR) offer targeted exposure to the obesity drug ecosystem. Expanding that pool, REX Shares is set to launch the REX Peptides ETF this week. Tracking the VettaFi Peptide Index, the new fund looks beyond GLP-1 drugmakers to capture the broader peptide ecosystem — including contract manufacturing organizations (CDMOs) and supply chain enablers building scaling production capacity.

Drivers Through Year-End

Heading into the fourth quarter, regulatory policy, M&A momentum, and Federal Reserve policy will drive near-term sentiment. Healthcare has historically shown resilience in higher-rate environments: Since 1990, the sector has averaged an 8.5% return over six months and 18% over 12 months following major 10-year Treasury yield spikes. Accelerating earnings add further support, with State Street projecting sector EPS growth to ramp up from roughly 3% in 2026 to 19% in 2027.

Not Just Playing Defense

Weight-loss drugs may have started the conversation, but but healthcare’s comeback reflects a broader convergence of attractive valuations, expanding earnings, biotech innovation, and institutional capital inflows. After years of relative neglect, healthcare is making a compelling case for a larger role in diversified equity portfolios.