Are healthcare stocks staging a comeback? A look at the sector

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Need a break from the AI trade? Healthcare and biotech just had their best week in about three years, a sign of life in an area that many investors have left for dead.

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Is it time for a comeback? That’s what we’re talking about on today’s stocks in translation.

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Now, of the 11 S&P 500 sectors, healthcare performance is dead last over the past three years.

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Here’s a chart from Todd Sohn at Strategas ETF Research that shows just how unloved poor healthcare has been, and that’s in green.

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And it’s been that way since this bull market began three years ago. and it’s especially so when you compare it to the tech sector in white.

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We’re talking $10 billion in net ETF outflows for healthcare versus about $40 billion in inflows for tech.

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And after an initial pop in late 22, healthcare has been a story of steady selling. Investors have thrown in the towel, according to Sohn, but if price keeps picking up, those outflows can reverse and fuel a catch-up trade.

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Here’s another way of looking at healthcare’s shrinking relevance.

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In this chart going back to 2011, also from Strategas, we’re taking a look at its weight in the S&P 500 versus that of industrials and also the world’s largest stock, Nvidia.

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Healthcare at the top in green has trended down over the last three years, while Nvidia at the bottom in white has rocketed higher.

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And you can see industrials in blue has just moved sideways since about 2020.

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That a single stock is nearly as big as two entire sectors tells you just how crowded the AI trade is.

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So diversification isn’t a bad idea.

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Let’s take a look at some reasons to consider healthcare.

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First, it trades with low beta, which is a measure of market sensitivity and lower volatility. Some more on this in a minute.

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We also just mentioned diversification, especially important when the AI trade cools or just takes a backseat as it has done a few times already in this bull market.

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And according to Strategas, healthcare tends to do better than the S&P 500 itself in years of midterm elections in the US, and that’s 2026.

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And some crucial context, ownership is thin after years of outflows.

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Not many investors are on board with the trade, which can lead to a game of catchup if price continues to pick up. And admittedly, that could be a big if.

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Here’s a direct comparison between the largest healthcare ETF, XLV, and the biggest semiconductor ETF, SOXX, which is based on the Philly Chip Index, the so-called Sox.

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We just mentioned market sensitivity or beta, which is much higher in the chips.

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It tends to go hand in hand with volatility, and these measures cut both ways.

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You don’t tend to get as many gut-wrenching spills, but you also have less potential upside.

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And you tend to get bigger dividends with many healthcare stocks. Chips just don’t return as much cash flow to the shareholders.

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But this can vary quite a bit when you drill down into healthcare’s many industries.

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If you do want higher beta and higher volatility, take a look at biotech or genomics ETFs.

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They might not pay big dividends, but they will have more potential upside, and of course, downside as well.

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Big pharmaceutical giants, they tend to pay bigger dividends.

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Finally, when it comes to valuation, like the famous price- to- equity ratio, chip stocks have a much higher multiple, which can be a warning.

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But I’d also add that valuations can stay stretched or also very low for years. So this is not a timing tool.

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And here’s your quick reality check.

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Rule one, price must stair step higher. Higher highs, higher lows, that is the definition of an uptrend.

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If price does the opposite and goes lower, those outflows will only get bigger.

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Then remember that rallies can be uneven. It can be very difficult to time a bottom in an unloved sector.

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And keep in mind that some industries within healthcare, they look much better than others.

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As an example, equipment does not have nearly a good a setup as biotech right now.

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Which leads to the final point.

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Always understand what you’re investing in. Stock and ETF selection matter greatly.

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Bottom line, the setup for healthcare is here. It’s hated, it’s underowned, finally moving.

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But the trade needs to earn investor trust to turn around.

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As Alpha Trends Brian Shannon likes to say, only price pays.

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And tune in to the Stocks and Translation podcast for more jargon busting deep dives. New episodes can be found Tuesdays and Thursdays on Yahoo Finance’s website or wherever you find your podcast.