Healthcare Stocks Hit a Record as Money Rotates Out of AI
Healthcare led gains across the S&P 500's 11 major sector indexes on Tuesday, October 20, 2026, and the sector index (.SPXHC) hit a record, Reuters reported. The S&P 500 tracks 500 large US companies, and its 11 sector indexes group them by industry, so each one shows how a single slice of the market is doing.
The move follows a visible shift in where money has been going. On October 15, Reuters reported that the S&P 500 had hit a record high the previous week and was up about 13% in 2026, with most of that gain fueled by AI-related stocks, while traders moved from AI names into healthcare. A Reuters video report on Tuesday said the Dow led Wall Street higher as investors focused on value stocks such as healthcare, while technology lagged after a rebound the day before. Reuters' healthcare index page, as of October 16, said investors were pouring money into U.S. healthcare stocks, betting that dealmaking and attractive valuations would extend the sector's gains.
The rotation is a reversal of recent leadership. In a July 16 report, MarketWatch said the top five holdings of the XLV healthcare ETF had all outpaced the S&P 500's 1.7% gain since mid-May, with Eli Lilly up 16.3%, Johnson & Johnson up 10.3%, and AbbVie up 20.9%. An ETF, or exchange-traded fund, is a fund that holds a basket of stocks and trades like a single share. Earlier, in August, MarketWatch noted that healthcare stocks had been overlooked while investors concentrated on energy, technology, and industrials.
Earnings expectations are part of the case. Reuters reported on August 5 that earnings for S&P 500 healthcare companies were expected to grow in double digits, meaning 10% or more, from the fourth quarter of 2026 through the end of 2027. Across the index, FactSet's Earnings Insight reports that analysts predict 32.8% year-over-year earnings growth for calendar 2026, meaning growth measured against the same period a year earlier.
Valuation is the other half. The forward 12-month price-to-earnings ratio, or forward P/E, divides the current price by expected earnings over the next year. FactSet puts the S&P 500's forward P/E at 19.0, below its 5-year average, per its latest Earnings Insight. That is a different picture from mid-year. A FactSet PDF dated June 26 showed the index forward P/E at 20.1, with Health Care falling 1.4% and leading three sector declines that week. A July 10 FactSet PDF put the forward P/E at 20.5, against a 5-year average of 19.9 and a 10-year average of 19.0. Healthcare's rally has therefore run alongside a broader market multiple that has compressed from its summer level, which is part of why the sector has been described as attractively valued.
Deal activity provides the third leg. Bain's Global Healthcare Private Equity Report 2026 states that healthcare private equity, meaning investment funds that buy companies outright, reached a record high in global deal value in 2025, driven by large transactions and recovering from a slowdown in the second quarter. A CBH report on 2025 trends and the 2026 outlook describes healthcare deal value as near record-breaking, with an estimated $140 billion in transactions and a 45% increase in deal value. Within health services, PwC's midyear outlook says the physician medical group subsector captured a record 46% share of first-quarter 2026 deal volume, and that eHealth accounted for 61% of disclosed deal value in the deals it reported.
Growth expectations for individual names are wide. ICR's Q3 update on High-Growth in MedTech, published October 12, reports that Street estimates for HGMT's revenue growth from 2025 to 2028 range from an approximately 18% to an approximately 57% compound annual growth rate, the average yearly rate after compounding. LSEG publishes a 2026-2028 consensus that shows the high and low estimate for each year, which is one way to see how far analysts disagree before the averages are taken.
The broader context matters for anyone with money in the market. For a saver or pension fund, the sector's appeal rests on three things that have to hold at once: earnings growth in the double digits, deal flow that keeps lifting valuations, and a multiple that stays below its recent averages. Each of those is a forecast, and each can move. A rotation driven by investors leaving a crowded trade can reverse as quickly as it started, and a sector-wide record reflects where prices have gone, not where they will settle. Whether those numbers hold through the next earnings season is the question the market will answer next.
