Health care stocks gain strength approaching 2026

After languishing in stable yet poor condition for the last couple years, health care stocks are showing vigor, and recent gains are creating highly positive expectations for continued momentum in 2026.

Underlying the sector’s improving condition is a distinct sea change in investor sentiment. Hence, health care is currently on the lips of many analysts, as various factors indicate that the cusp of 2026 is a propitious time to get in or add shares.

Already, there’s been a significant upsurge in investment inflows. Between October 1 and November 17, more cash flowed into health care than into any of the other 10 market sectors.

One major fund, SPDR Health Care Select Sector ETF (XLV), as of Thanksgiving had gained nearly 9% over the preceding four weeks and more than 16% in the preceding three months, after posting negative numbers in 2024.

Upward inflection

In October and early November, health care stocks inflected upward relative to the S&P 500, hitting multi-month relative highs. The sector’s ascent was led by pharma, which began advancing in August, and then by biotech, with a sharp move up in September.

Health care’s revitalization is part of the market’s broadening performance from AI-driven tech stocks to other sectors. Health care indexes have benefited from investors’ concerns that their portfolios had become tech-top-heavy from the meteoric growth of tech holdings since May.

Mindful of risk from overconcentration in tech stocks, institutional investors have been diversifying into defensive sectors, health care among them.

Structural factors driving health care investment include:

• Incessant long-term demand from the graying of America. By 2030, projections hold, more than half of the American population will be over 65 — the outcome of the post-WWII baby boom and health care advances that are helping people live longer. Demographics indicate this will be a powerful demand driver well into the next decade.
• Relative immunity from economic downturns. Insured people will always be seeking care — especially those on Medicare. Enrollees with solid supplemental plans tend to have strong protection against hurtful copays, so they don’t hesitate to seek care.
• Long-term prospects. The economy is currently still quite strong, though fewer and fewer new jobs are being created. So, if this very gradual slowing eventually evolves into a recession (shrinking jobs), health care stocks will become more attractive as an equity redoubt. This recession-proofing adds to health care’s allure as a long-term hold.
• Concerns that AI investment may be a bubble. Though big AI-focused companies will probably continue to do well in the next few years, the tech stock pullback in November reflects some investors’ view that the hyper-scaling of AI infrastructure by huge tech companies — and/or the market’s expectations for the ultimate business outcomes from this build-out — may be well ahead of itself. More AI-related selling would free up cash for the broader market, including health care.

Auspicious midterms

The market has a long history of rotation — when sectors change their relative performance. Accordingly, it has long been inevitable that health care performance would improve; the question was when.

The approach of 2026, a midterm election year, is apparently helping to answer that question. Institutional investors, mindful of the sector’s history of outperformance in midterm election years, have been piling in.

In midterm elections, which occur in November in the second year of each presidential term, the political party not in the White House almost always gains seats in the House of Representatives.

As Democrats need to take six seats—after three vacancies are filled, probably eight seats—to wrest the House majority from the GOP. Historically, that isn’t many, as double-digit gains have not been uncommon in past midterms. The strong performance of Democrats nationwide in the November elections for state and local offices has reinforced political analysts’ projections of a likely Democratic takeover of the House in November, 2026.

The historical tendency for the House majority to flip creates policy uncertainty, resulting in market volatility. The outcome of the elections in November indicate that uncertainty will likely be especially heightened in 2026 and with it, market volatility. This suggests taking a highly tactical approach to equity portfolio allocations.

The outperformance of health care stocks in midterm years is remarkably strong. In midterm election years from 1994 to 2024, the sector has outperformed the S&P 500 by an average of nearly 17%.

Companies that have outperformed the S&P 500 in at least 75% of midterm election years from 1994 to 2022 have included more in the health care sector than any other.

Household names

This group includes 22 companies that are household names for keen investors and patients—in some instances, literally for those with certain products in their medicine cabinets: AbbVie, Amgen, Becton Dickenson & Co, Cardinal Health, Centene, Danaher, Dexcom, Eli Lilly, HCA Healthcare, Henry Schein, Hologic, Humana, IDEXX Laboratories, Insulet, Merck, Molina Healthcare, Stryker, Thermo Fisher Scientific, UnitedHealth Group, Universal Health Services, Viatris and Waters Corp.

Among the companies that have underperformed the S&P 500 during this same 28-year period, none were in health care. Companies with this dubious distinction represent eight of the market’s 11 sectors: communications services, consumer discretionary, financials, real estate, industrials, materials, technology and energy.

During this same period, overall market corrections historically have been deeper in midterm years than in the other three years of any given presidential term, and recoveries within one year have been greater.

Thus, if this history ends up repeating or even just rhyming, investors would likely capture significant outperformance in 2026 or, if the market undergoes a long-belated correction, potentially substantial gains in 2027.

Though the health care sector is expected to post good overall average gains next year, there’s perhaps more potential in medical devices, a subindustry that comprises artificial joints, pacemakers, stents, diagnostic devices and a wide variety of disposable items used in surgery. Investing in medical devices is a picks-and-shovels approach — a gold-rush metaphor indicating suppliers rather than the care facilities that use their products.

Gains of only about 10% this year as of Thanksgiving for a dominant fund in this space, iShares US Medical Devices ETF (IHI), indicate that this subindustry hasn’t heated up as much as health care overall. Yet the strength of this fund’s constituents — including Abbott Laboratories, Intuitive Surgical, Boston Scientific, IDEXX Laboratories, Edwards Lifesciences and Medtronic — indicates good prospects.

Another slice of this sector with particular potential is biotech, which is already out of the gate and sprinting. Since June 1, Sector SPDR Biotech ETF (XBI) is up 55%, propelled in part by what investors see as the potential of AI applications under development.

AI isn’t just the future of health care. It’s also the present, transforming the practice of medicine, according to one publication from the National Institutes of Health. AI is helping the industry become more efficient, improving diagnostic tools and processes and improving various devices. In pharma, digital advances have long accelerated new-drug development. AI applications are expected to speed up pharma R&D.

Compared to 2025, many analysts are projecting lower overall market performance next year. But as always, the goal is to achieve relative outperformance. Adding well-chosen health care investments to portfolios would probably help investors achieve this goal while buttressing against broad market drawdowns.

Dave Sheaff Gilreath, CFP,^® is a Partner Advisor at Sheaff Brock Investment Advisors, powered by Allworth Financial LP, an investment advisory firm registered with the SEC. Investments mentioned in this article may be held by Allworth Financial, affiliates or related persons.