Four months ago, my colleague Miles Savitz pointed out that healthcare valuations had reached a historic low, creating an attractive entry point into the sector (see the article here). Since then, global healthcare stocks have outperformed the broader market by 7%. We think the sector has more room to run.
The primary driver has been earnings. In Q3, the U.S. healthcare sector saw the second-highest year-on-year revenue growth within the S&P 500, bested only by the tech sector. Healthcare’s 10.4% revenue growth, compared with the 8.0% expected, resulted in the largest revenue surprise of any sector last quarter. Historically low valuations, low expectations, and oversold conditions created a coiled spring that would rally on any positive news. Yet the global healthcare sector discount to global equities remains at a historic low of -2.4x, a level seen only twice in the last 20 years (’09 and ’20).
Going forward, we believe the healthcare sector will continue to benefit from several powerful tailwinds.
- First, we expect to see continued tariff exemptions for pharmaceutical companies as the administration’s attention shifts to midterms and the need to address affordability concerns. Food and medical costs are among the most visible expenses for the middle class and tariffs that raise the price of drugs will be diluted to soften the impact.
- Second, the One Big Beautiful Bill Act allows for immediate expensing of research and development costs, instead of today’s requirement of amortization. This immediately improves the pharmaceutical and biotechnology industries’ bottom lines and will continue to be priced in by market in coming quarters.
- Third, the rollout of GenAI is going to shorten and lower the cost of drug discovery, making the sector not just a great defensive allocation but potentially one with a renewed growth story. Investors are likely to seek out new beneficiaries of the AI boom beyond the hardware providers, and pharma is likely to see investor flows.
- Lastly, we expect to see a continuation of structural changes such as aging populations and higher per-capita discretionary medical spend globally. This makes the sector an excellent defensive play should the labor slowdown accelerate.
In short, while healthcare is no longer oversold from a technical point of view, it remains historically cheap and offers compelling opportunities for investors in 2026.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.
The MSCI World Health Care Index is designed to capture the large and mid-cap segments across 23 Developed Markets (DM) countries. All securities in the index are classified in the Health Care as per the Global Industry Classification Standard (GICS®).
