Clients craving innovation beyond tech? Insight on healthcare stocks

Key takeaways

• The healthcare sector is seeing tangible AI benefits, with meaningful progress in both regulation and technology over the past year.
• Yet healthcare also exhibits low correlation and defensive characteristics that make it a compelling counterbalance to the AI juggernaut.
• Active equity investors Carrie King and Erin Xie address key questions about this innovative and underappreciated sector.

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In our Q2 Equity Market Outlook, we identified healthcare as one area where artificial intelligence (AI) is having tangible benefits and presenting investors with new expressions of the AI investment theme. While healthcare may glean some luster from an AI halo, the investment case is also one of counterbalance to the AI juggernaut.

Investors seeking growth potential through innovation traditionally looked to both technology and healthcare. Yet tech has gained far greater attention ― and asset flows ― since the advent of ChatGPT in November 2022.

Today, as clients may be starting to look for areas of opportunity outside of technology, we believe some capital could find its way back to healthcare. The sector’s innovative edge comes with relatively low correlation to tech ― and the broader tech-driven U.S. stock market ― and with historical elements of resilience. This could make tech and healthcare powerful portfolio complements.

With all of this in mind, here we address key questions about healthcare stocks today:

1. How is AI being used in healthcare?

Last year marked a turning point for AI in healthcare, with progress in both regulation and technology.

In April, the Food and Drug Administration (FDA) began allowing certain computer-based alternatives to animal testing for new medicines, reducing time and cost in early research.

By September, the agency rolled back a rule that would have added extra oversight for lab-developed tests, giving diagnostic companies more flexibility to bring new tests to market.

In November, a new executive order directed the Department of Energy (DOE) to build a unified AI platform using data from 17 federal labs to accelerate breakthroughs in biotech, chemistry and energy, with goals of shrinking research timelines.¹

We’ve seen a dramatic pick-up in the pace of AI-enabled medical device authorizations. The FDA cleared just six AI devices in 2015, compared to 331 in 2025 ― a roughly 55-fold increase in a decade, with a cumulative total of 1,394 authorized AI and machine learning devices since 2015. Radiology and diagnostics account for the overwhelming majority (77% of all clearances), reflecting AI's natural fit in pattern recognition across imaging, pathology and clinical decision support.²

2025 also ushered in practical AI tools in diagnostics and research. Companies are increasingly embedding AI into their platforms to extend the value of testing and support clinical decisions. Two cancer testing pioneers have already made meaningful progress in this space.

Meanwhile, major pharmaceutical companies are partnering with specialized diagnostics firms that hold vast genomic and clinical datasets. By combining these data with advanced AI models, the goal is to improve how cancer is detected, monitored and treated. Such collaborations aim to make care more personalized and drug development more efficient.

2. Are healthcare stocks a defensive investment?

Healthcare is typically seen as a defensive sector. For one, medical needs do not wait on the economy and, as such, demand for health services is generally less sensitive to economic conditions. This can allow revenues to hold up even in recessionary periods, particularly among the more essential areas such as pharmaceuticals, providers & services and managed care.

Healthcare is also underpinned by structural forces such as aging populations across the developed world, which increases the long-run demand for healthcare products, equipment and services. The proportion of the U.S. population older than 65 is projected to reach 20% by 2030, according to S&P Global Market Intelligence. This cohort is estimated to spend two to three times more per person on healthcare than those under 65.

We also observe that healthcare returns in 2025 were driven by fundamentals distinct from the mega-cap technology cohort that dominated headlines and experienced heightened volatility. And over the longer term, healthcare and tech have exhibited low to moderate correlation, suggesting the two can provide offsetting risk/reward characteristics in a portfolio. In recent years, as the market narrative has been dominated by the AI mega force, this correlation has hovered around its lowest in two decades. See chart below.

Powerful partners?
Tech vs. healthcare correlation, 1995-2025

3. Is now a good time to invest in healthcare?

We believe it is a good time to invest in healthcare stocks and see a potential set-up for improving performance:

Fundamentals are strong. 89% of healthcare companies within the S&P 500 exceeded earnings expectations in the four quarters of 2025, ranking second among all sectors.³ In addition to broadly exceeding earnings expectations over recent quarters, analysts anticipate an acceleration in healthcare earnings growth in 2027, driven by pharmaceuticals and managed care.⁴

Valuations are low with room to grow. The pattern of positive earnings surprise suggests underlying demand across the sector is stronger than the market is acknowledging. Yet healthcare continues to trade at a valuation discount to broader equities. The sector historically has been priced at a premium but today sits at a 16% discount to the market, as shown in the chart below.

A relative value
Healthcare vs. broad market valuations, 1995-2026

For investors, this combination of sound fundamentals and discounted valuations may present an attractive opportunity to enter or add to positions in healthcare stocks, particularly if earnings outperformance persists and valuation gaps continue to close.

We also see healthcare as a hotbed of innovation and believe the AI impact on human health companies has yet to be recognized by the market.

4. What role does government policy play in the outlook for healthcare stocks?

A wave of policy headlines started in April of last year with the announcement of sweeping tariffs. This was followed by the One Big Beautiful Bill Act (OBBBA) and the Most Favored Nation (MFN) rule, the policy of aligning U.S. pharmaceutical drug pricing with the lowest prices paid in other developed nations. Taken together, these policy headwinds pushed healthcare to match its steepest discount in 30 years, as shown above.

Fast forward to 2026 and policy clouds are mostly clearing. Tariffs are largely a quieted concern as companies have secured three-year exemptions for U.S. manufacturing plans, limiting financial impact. The OBBBA passed in July and left much of the non-Medicaid market undisturbed. Clarity on MFN, the biggest overhang for the sector, also started to emerge. To date, 17 global pharma companies have reached agreements with the administration on drug pricing.⁵

5. How can clients invest in healthcare stocks?

We believe strongly in the need for an active approach to investing in healthcare stocks. This is because the sector is highly specialized and its composition and performance are not homogeneous. Subsector returns over the past 10 years point to a high degree of differentiation. In 2025, inter-sector dispersion was extreme with biotech up 33% and healthcare services & providers down 7%.⁶

Last year, healthcare also exhibited among the highest levels of stock-specific dispersion, second only to technology, as shown below. This reflects the breadth of possible outcomes when investing in this space, with differentiation driven by rapid innovation, regulatory developments and company-specific fundamentals. Sharp delineations between winners and losers means more compelling opportunities for security selection and potential for outperformance relative to tracking a broad healthcare index.

Wide gaps between leaders and laggards
Dispersion in Russell 1000 sectors, 2025

The bottom line: With greater visibility around policy, both companies and investors have a clearer line of sight into earnings drivers across the healthcare sector. A fertile innovation landscape in 2026 and healthcare’s historically low to moderate correlation to the technology sector and the broader S&P 500 strengthens the case for diversification. All of this is underpinned by powerful demographic tailwinds and, taken together, helps to shape our positive outlook for healthcare stocks in 2026.