The S&P 500 healthcare index has risen 11.2% in three months to a record high, helped by improving earnings expectations, stronger M&A activity and valuations still seen as attractive.
U.S. healthcare stocks are drawing fresh investor interest as money rotates beyond the AI-led technology trade and into sectors viewed as offering steadier growth and cheaper valuations. The S&P 500 healthcare index has climbed 11.2% over the past three months, ahead of the S&P 500's 6% gain, while about 50 U.S.-listed healthcare funds pulled in $2.44 billion in July after nearly $1.5 billion of inflows in June, according to LSEG Lipper data. Investors and analysts point to a mix of factors behind the rebound: expectations for a sharp recovery in sector profits, stronger dealmaking and the view that healthcare remains relatively inexpensive versus the broader market. J.P. Morgan analysts led by Head of Global Markets Strategy Dubravko Lakos-Bujas said the sector offers durable growth, strong profitability, attractive valuation and diversification benefits for portfolios still concentrated in AI-related names. A Bank of America survey showed global fund managers were net 32% overweight on healthcare in July, up from 14% in June. Analysts said recent company results have also helped repair sentiment after a weak start to the year. AbbVie beat second-quarter profit estimates, while UnitedHealth Group topped profit expectations and raised its 2026 forecast. Dealmaking is adding to the appeal as well, with healthcare M&A reaching nearly $284 billion this year, according to Dealogic, close to 2025's full-year $306 billion and higher than every year since 2021. A media report that AstraZeneca and Bristol-Myers Squibb discussed a possible merger also underscored the industry's consolidation theme. Even after the rally, the sector was trading at around 18 times 12-month forward earnings expectations, above its 20-year average of 15 but below the S&P 500's nearly 20. Strategists say that, unlike some short-lived rotation trades in the past, the current move may prove more durable because it is happening while the broader index remains at record highs. Investors are also watching the November midterm elections, with analysts saying a divided government could reduce the risk of legislation that pressures earnings, while a Democratic House could revive efforts tied to the Affordable Care Act and Medicaid that may help some insurers and hospital operators.