Wealth managers expect healthcare sector momentum to continue into new year

Even though healthcare stocks finished 2025 trailing the overall market, wealth managers say the bullish case for the sector remains alive and kicking in 2026 thanks to demographic and valuation tailwinds.

The State Street Health Care Select Sector SPDR ETF (Ticker: XLV) returned around 11% last year, about 5 percentage points below the greater S&P 500 index. Advisors say the sector’s underperformance was influenced by several factors, including regulatory uncertainty, drug pricing ambiguity, and the popularity of large-cap technology stocks compared to the more defensive healthcare sector.

Still, healthcare stocks posted an impressive 14% sprint higher in the final six months of 2025, and wealth managers believe that momentum should continue into the new year.

“The bull case for healthcare is the aging population of our country and the need for drugs and medical services,” according to Kevin Thompson, founder and CEO of 9i Capital Group. “The major hurdle is legislation and how the current administration attacks drug pricing and brings down healthcare expense for the everyday American.”

Thompson believes biotech stocks should lead the way within the healthcare space as America continues to use its competitive advantage in this area to show global dominance.  

“If we learned anything from the pandemic, America has the wherewithal to create drugs and rapidly, so I would expect America to double down on this advantage moving forward,” Thompson said.

Jason Britton, founder and CIO of Reflection Asset Management, meanwhile, believes the advances in weight management will continue to underpin gains in healthcare stocks. In his view, GLP1 moving from injectable to pill form will keep investors excited about the space.  

“AI assisted diagnostic and other efficiencies will continue to alleviate the labor shortage issues, and the insurance/managed care space will be challenged, but should see some relief with the clarity from the OBBB that Congress passed late in 2025,” Britton said.

Moving on, Dory Wiley, president & CEO of Commerce Street Holdings, says several structural tailwinds could drive stronger healthcare sector performance, including stabilizing earnings growth, accelerating innovation in areas like obesity treatments and AI-enabled solutions, an aging population boosting demand, and expected robust M&A activity as financing conditions improve.

“The bull case centers on attractive valuations after recent underperformance, such as the S&P 500 Health Care Sector trading at a forward P/E of around 17-19 times, a meaningful discount to the broader S&P 500's 22-23 times,” Wiley said.

Risks that could pressure the sector in 2026, according to Wiley, include ongoing regulatory and policy uncertainty, particularly around reimbursement changes. Other risks in his opinion include potential Medicaid funding cuts, and RFK Jr.'s MAHA focus on chronic disease prevention, scrutiny of ultra-processed foods & additives and vaccine transparency.

“Regarding RFK Jr.'s initiatives, they introduce a layer of differentiation within the sector. Stocks set to perform well could include those aligned with preventive care, lifestyle interventions, and environmental health—such as companies in nutrition-focused wellness, digital prevention platforms, or alternative therapies emphasizing non-drug approaches to chronic conditions,” Wiley said.

PAGING DR. POWELL!

As to whether Federal Reserve rate cuts will help boost healthcare stocks as well, 9i Capital’s Thompson says lower rates would be good for deal making and cheap capital for investment.  

“Most of the companies are small to mid-cap, especially in the biotech space, so you could see ballooning valuations if rates move dramatically. However, rate cuts have been muted for '26 with only 1 or 2 expected,” Thompson said.

Jason Britton, founder and CIO of Reflection Asset Management, believes reduced borrowing costs will continue to give big Pharma the ability to buy up pipeline assets through M&A and should continue to support valuations and encourage deal activity.  

“I think this coupled with a continued business friendly environment should lead to more investor appetite and activity,” Britton said. 

Finally, Commerce Street’s Wiley says further Fed rate cuts should support healthcare names by lowering borrowing costs, expanding multiples on growth-oriented names, stimulating M&A, and boosting investor appetite for the sector's defensive qualities in a potentially softer economic environment.