We recommend a market-weight position in the . It is down 3.8% ytd, the worst among all 11 sectors, and remains one of the clear laggards of the bull market that began in October 2022 (chart).
That underperformance has created selective opportunities. The aggregate sector still lacks a near-term earnings catalyst, carries the second-lowest forward profit margin in the index, and has the weakest 2026 EPS growth outlook of any S&P 500 sector. However, some of the industries within the sector have improving outlooks. Pharma is rerating as GLP-1 economics mature into a durable earnings base, while Biotech is benefiting from M&A activity, patent-cliff pressure, and improving risk appetite.
Health Care has quietly held up month-to-date, eking out a small gain, while the S&P 500 sits modestly in the red and high-beta pockets like the , , and sectors have all dropped more than 4.5%. The sector also trades at a 17.1 forward P/E, below the S&P 500’s 20.4. We would own the areas where earnings, margins, and catalysts are improving, not the whole index.
Consider the following:
1. Composition
Health Care accounts for 8.8% of the S&P 500’s market capitalization, the lowest weight the sector has carried in three decades. The S&P 400 MidCap and S&P 600 SmallCap sectors carry larger weights of 8.9% and 11.5%, respectively (chart). SmallCap Health Care is up 8.7% ytd, and MidCap Health Care is up 4.3%, both well ahead of LargeCap Health Care’s 3.8% decline. Smaller companies have benefited from M&A premiums and are less exposed to the mega-cap pharma and equipment drag.
2. Breadth
Health Care’s performance gap is unusually wide. Managed Health Care leads the sector, up 22.1% ytd, while Health Care Equipment is down 23.8% (chart). Managed Care has rallied on a stronger-than-expected 2027 Medicare reimbursement rate, while Equipment has been pressured by litigation overhangs and dilutive acquisitions.
The earnings picture is just as uneven. Health Care Services is up 14.4% ytd, supported by a 2026 EPS growth forecast of 7.2%, nearly triple the sector’s 2.5% forecast (chart). Pharmaceuticals are the exception. The industry’s 4.0% ytd gain rests on only 1.0% expected 2026 EPS growth.
3. Earnings trough
Health Care is in its own earnings cycle. The sector’s 2026 EPS growth forecast of 2.5% is the lowest of any S&P 500 sector and far below the S&P 500’s 24.3% forecast (chart). Prospective growth in 2027 looks better, with expected EPS growth rebounding to 19.2%. The trough reflects Pharma’s compliance reset following 2025’s 32% earnings surge, while litigation continues to drag on Health Care Equipment. Net earnings revisions for 2027 are turning higher.
4. Margin compression
The sector’s forward profit margin has fallen to 8.2%, the second lowest in the index, down from a peak of 11.5% in February 2022 (chart).
5. Pharma’s rerating
Pharmaceuticals remains our preferred pocket within Health Care. The S&P 500 Pharmaceuticals index is up 4.0% ytd and accounts for 37.6% of the sector’s market capitalization. Its forward profit margin has climbed to 30.1%, near a record high, almost four times the sector average (chart). Pharma trades at an 18.2 forward P/E, below its 18.7% expected 2027 EPS growth rate. That makes it one of the cleaner growth-at-a-reasonable-price opportunities in the sector.
6. Biotech
Biotech has recovered, but the recovery has been selective. Equal-weighted and show better breadth than cap-weighted IBB, while speculative remains far below its 2021 peak (chart).
Biotech’s fundamentals are still mixed. Forward earnings has stalled since peaking at $433 per share in January 2022, while the forward profit margin has compressed from above 40% to 30.1% (chart). Longer term, AI-driven drug discovery could lift R&D productivity, but that upside is not yet visible in reported earnings.
Health Care is no longer a sector to ignore, but it is still not a broad overweight. The index-level numbers remain weak, with slow earnings growth and compressed margins. The opportunity is underneath the surface.
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