By Shashwat Chauhan and Kanchana Chakravarty
August 5 (Reuters) - Investors are pouring money into U.S. healthcare stocks, betting that improving earnings, rising dealmaking and attractive valuations will extend the sector's rebound after years of underperformance.
The renewed appetite for healthcare reflects a broader shift in investor positioning, with financials also seeing gains, as Wall Street's rally expands beyond the handful of AI-linked technology companies that have dominated returns for much
of the year.
The S&P 500 healthcare index has climbed 11.2% in the past three months to hit a record high, outpacing the S&P 500's 6% rise. Around 50 U.S.-listed healthcare funds attracted $2.44 billion in July, according to LSEG Lipper data, extending June's nearly $1.5 billion inflow and reversing a three-month stretch of net withdrawals.
"Healthcare offers a rare combination of durable growth, technology-like profitability, attractive valuation and diversification benefits at a time when many investors remain heavily concentrated in the AI theme," J.P. Morgan analysts led by Head of Global Markets Strategy Dubravko Lakos-Bujas said.
A Bank of America survey showed global fund managers were net 32% "overweight" on healthcare stocks in July, up sharply from 14% in June.
EARNINGS GROWTH, M&A HEATS UP
The surge in healthcare follows a stretch as one of the S&P 500's weakest performers in the first five months of the year, with investors now looking ahead to a sharp improvement in profitability.
Earnings for S&P 500 healthcare companies are expected to grow in double digits from the fourth quarter of 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 seen in the second quarter of 2026.
"Sentiment around the healthcare sector had become overly negative, and recent earnings results and management commentary have helped alleviate some of these concerns," said James Harlow, director of research at Novare Capital Management.
Drugmaker AbbVie topped second-quarter profit estimates in its most recent earnings and health insurer UnitedHealth Group beat profit expectations and raised its 2026 forecast.
A surge in dealmaking has also added to the sector's appeal, analysts said. M&A value in the sector 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 suggested AstraZeneca and Bristol-Myers Squibb held talks about a possible merger, which could create one of the world's biggest pharmaceutical companies with a combined value of nearly $400 billion.
VALUATIONS STILL ATTRACTIVE
Valuations remain a key point, as the sector has been widely regarded as historically cheap.
"Healthcare valuations had been depressed for a long time and so there is some opportunity for investors," said Christian Peng, head of healthcare investment banking at Citizens Bank.
The sector was last trading at around 18 times its 12-month forward earnings expectations, trading above its 20-year average of 15. The S&P 500 meanwhile, last had a valuation of nearly 20 times its forward earnings.
Still, some analysts drew parallels to the tech selloff in 2022, where a similar rotation trade soon lost charm as investors grew confident in the tech rally once more.
What stands out this time is the fact that the S&P 500 is at record highs, according to Mark Hackett, chief market strategist for Nationwide.
"People are actively moving to some of the forgotten areas of the market and that tends to be more sustainable, particularly if they can follow through with better earnings."
THE MIDTERM ELECTION BONUS
Healthcare will be a key point of debate heading into the November midterm elections, but the expected impact on companies could vary.
If Democrats take control of the House, they would likely revive efforts to expand the Affordable Care Act, strengthen Medicaid funding and push back against U.S. President Donald Trump's recent actions to roll back coverage mandates.
Such a shift could benefit health insurers with large Medicaid and Affordable Care Act businesses. Hospital chains could also gain from higher insured patient volumes.
J.P. Morgan analysts said healthcare equipment and services companies have historically performed well during midterm years, though they do not expect a material change in healthcare policy this year.
Some see a divided government in Washington as a tailwind for healthcare stocks.
"It's a net positive for the healthcare sector because it means some of the threat of earnings-pressuring legislation could potentially go away," said Eric Parnell, chief market strategist at Great Valley Advisor Group.
(Reporting by Shashwat Chauhan, Kanchana Chakravarty and Sriparna Roy in Bengaluru; Editing by Colin Barr and Vijay Kishore)
