Wall Street warms to healthcare stocks as tech trade faces turbulence

• Healthcare company earnings are projected to grow in double digits from Q4 2026 through end of 2027, reversing a 16.7% contraction seen in Q2 2026
• M&A activity has surged to nearly $284 billion in 2026, approaching 2025's full-year total of $306 billion, with potential mega-mergers like AstraZeneca and Bristol-Myers Squibb being discussed
• The sector trades at 18x forward earnings versus its 20-year average of 15x, still cheaper than the S&P 500's nearly 20x multiple, while Bank of America's survey shows fund managers at 32% 'overweight' on healthcare in July

Wall Street Warms to Healthcare Stocks as Tech Trade Faces Turbulence

Key Market Shift:

U.S. healthcare stocks are experiencing a significant rebound as investors diversify beyond AI-focused technology stocks. The S&P 500 healthcare index has surged 11.2% over the past three months, reaching record highs and outpacing the broader S&P 500's 6% gain.

Investment Flows:

Healthcare funds attracted $2.44 billion in inflows during July 2026, following $1.5 billion in June, reversing three months of net withdrawals. A Bank of America survey showed global fund managers were 32% "overweight" on healthcare in July, up sharply from 14% in June.

Earnings Outlook:

S&P 500 healthcare companies are expected to post double-digit earnings growth from Q4 2026 through end of 2027, a dramatic reversal from the 16.7% earnings contraction seen in Q2 2026. Companies like AbbVie and UnitedHealth Group have beaten profit estimates and raised forecasts.

M&A Activity:

Dealmaking has intensified, with M&A value reaching nearly $284 billion year-to-date, approaching 2025's total of $306 billion. Reports of potential talks between AstraZeneca and Bristol-Myers Squibb suggest a possible merger creating a nearly $400 billion pharmaceutical giant.

Valuation Appeal:

Healthcare stocks trade at approximately 18 times forward earnings versus the sector's 20-year average of 15, remaining cheaper than the S&P 500's nearly 20 times multiple.

Political Considerations:

The November midterm elections could impact the sector differently depending on outcomes. A Democratic House could benefit health insurers and hospital chains through expanded coverage, while divided government may reduce regulatory threats. J.P. Morgan analysts noted healthcare equipment and services historically perform well during midterm years.